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US production growth drives structural change in global oil market

US production growth drives structural change in global oil market
The increase in US hydrocarbons and derivatives production is so large that it amounts to a structural shift in global oil markets that will keep oil prices, measured in 2015 dollars, below $100 until 2030.

In developments in the last 12 months, the US was now the largest worldwide producer of condensates, the largest refined products and LPG exporter, and would become among the top three LNG exporters by 2022.

"Some serious things are now taking place. US oil production peaked in 1971 and declined for 40 years," Fereidun Fesharaki, chairman, Facts Global Energy, told the Fujairah Bunkering and Fuel Oil Forum this week.

"What the US added in production in 2010-14 would make it second-biggest OPEC producer today."

Global oil production was 2mbpd more than demand, driving prices in a downward direction. He predicted near-term prices of $35-40 for Brent and $8-10 less for WTI.

Longer-term, oil will be around $50-$80 a barrel with OPEC on board, or $40-50 in another scenario.

He saw it as unlikely that Saudi Arabia would abandon its current tactic of defending market share. “OPEC participation would mean Saudi Arabia cutting production by 1.5mbpd. But it’s clear that Saudi Arabia won’t cut,” he said.

Fesharaki said US production growth would keep rising this year at the same rate as last, as many traders had sold oil forward.

Addressing the issue of price, he said that, unlike other jurisdictions, where government or regulator might dictate terms, the US market was so fragmented that no one actor drove price.

“In the US, the boss is Mr Price,” he said.

This made it difficult to predict which way the market would go, but Fesharaki sees a price ladder of between $30-80 as the range where US producers, facing various production costs, will operate. “Some lose, some make.”

He said that Asian fuel oil demand was in retreat, largely due to IMO 2020 sulphur limits, but added that the Fukushima crisis and the sustained high level of oil prices had contributed.

He forecast LNG would provide around 1.5% of marine fuel energy in 2020, rising to 12% by 2030.

LNG demand is subject to the difficulties that suppliers and off-takers experiencing in reaching a deal. Suppliers want long-term contracts while end-users are happy with spot-market dynamics today.

He said demand for LNG bunkering would grow strongly, due to regulation. "This will be driven by bunker fuel specification changes and the growing post 2025 oil price premium over gas."

A number of petrochemicals plants that had been shut down were being reopened. US natural gas prices had made coal uneconomic in domestic markets and coal exports to Europe were increasing.

Last year at an oil and gas conference in Dubai, Fesharaki forecast an $80 floor on oil prices.

“This is a structural change. The last structural change was in 1971, when OPEC took control of production. This is a fundamental shift in the way oil markets are designed,” he said.