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Oil prices will be driven mainly by the rise in non- Organization of the Petroleum Exporting Countries (OPEC) supply growth in 2014 and 2015, which is expected to outpace the growth in global oil demand. Geopolitical risks will continue to play an important role in determining global oil prices.
We expect growth in non-OPEC supply in 2014 to be around 1.25 million barrels a day, lower than OPEC's and International Energy Agency (IEA)'s latest monthly projections. Within this total, the majority of the additional crude oil is expected to come from North America, where oil output is forecast to increase by 1.1 million barrels a day in 2014. There is also expected to be small growth in European and Russian oil output in 2014.
In 2015, we expect non-OPEC supply to increase by 1.3 million barrels a day. Once again, the main driver of non-OPEC supply will be North American unconventional crude oil, where supply is expected to rise by 1.15 million barrels a day in 2015. A positive growth contribution is also expected from Latin America.
On the demand side, we expect global demand for crude oil to increase by around 0.9 million barrels a day in 2014 and 1.2 million barrels a day in 2015. Our demand growth forecasts have been revised downwards in recent months due to weaker than expected consumption emanating from two of the largest oil consuming regions, China and Europe.
Geopolitics has played a significant role in influencing Brent prices since the Arab Spring in 2011. In 2014, the three most important focal points have been Iraq, Libya and Russia and Ukraine. Although the recent risks associated with the above three risk factors have diminished for the time being, there is a high chance that these risks may return. We can expect risk premiums to be added to Brent if, a) the situation between Ukraine and Russia was to escalate further, leading to the possible sequestration of Western assets, such as BP's 19.75 per cent stake in Rosneft and/or, b) the political crisis in Libya erupted sporadically, leading to crude oil output outages or export disruptions and/or, c) ISIS-led operations start to disrupt oil production in Iraq.
Due to the widening gap between strong growth in non-OPEC supply versus more modest growth in global demand, we would expect Saudi Arabia to take the lead in reducing output during the second half of 2014 to reflect the decline in the expected daily call on OPEC. Against this backdrop with geopolitical risks to crude supplies expected to remain in place we would expect Brent prices to average $107.9 a barrel in 2014.
In 2015, we would expect the gap between growth in global demand and growth in non-OPEC supplies to diminish, and Brent prices to average $106.7 a barrel.
Spread between Brent and WTI
With Brent prices under pressure and West Texas Intermediate (WTI) expected to receive limited support from a potential increase in US condensates exports, this should help keep the Brent-WTI arb at around $4-6 a barrel for the remainder of 2014.
New pipelines coming online later this year will increase inbound flows of crude to Cushing by up to 800,000 a barrel. This could potentially help widen the spreads between Brent and WTI, due to a resumption of stock accumulation at Cushing in 2015. Conversely, the Brent-WTI spread could narrow further if the US takes additional measures to lift its ban on crude exports. i.e. by permitting more widespread exports of lightly-processed crude such as condensates.
The author is lead oil markets analyst, Natixis Commodities Research, London
