Monday, 15 December 2014

Oil - Four questions for 2015

A pickup in demand, a slowdown in shale oil growth, a cut from OPEC and a recovery in the oil price are expected in 2015

Oil had an eventful year in 2014. It rose all the way up to $115 in the first half of the year before collapsing spectacularly in recent months—it now stands close to $60. This post discusses four key questions which are likely to shape the oil market in 2015.

1. Will demand for oil pick up?

Yes. Growth in the demand for oil in 2014 was the weakest in five years—demand rose by only 0.6m barrels per day (b/d), according to the International Energy Agency (IEA). But demand growth is set to recover slightly in 2015 to 0.9m b/d on the expectation of higher growth for the global economy. The International Monetary Fund forecasts an increase in the growth rate of the global economy from 3.3% in 2014 to 3.8% in 2015. This is likely to have a positive impact on oil consumption. Lower oil prices are also expected to contribute to the demand increase. 

2. Will shale oil production slow down?

Yes. The rise of shale oil has been truly impressive. The US oil production is expected to increase by 1.4m b/d in 2014, mostly from shale. This means that the US has added the equivalent of the total production capacity of a whole country like Libya in one year. However, these gains are expected to slow down as lower oil prices make some shale projects unprofitable given the high costs of extraction. Some shale firms have already announced cuts in their investment spending for next year, while others are expected to follow suit in January/February when they unveil their investment plans. As a result, the US oil production growth is expected to slow down to 0.95m b/d in 2015.

3. Will OPEC cut its production?

Yes. The latest OPEC forecasts, published a few days ago, suggest that a cut is probable. These forecasts indicate that OPEC might need to cut 1.1-1.4m b/d from its crude oil production of 30m b/d to balance the market and remove the excess supply (see Table 1).

OPEC will probably wait until significant reductions in the investment spending of shale oil firms have been announced before embarking on a cut of its own. This means that it is unlikely to act before February but could potentially step in before its next scheduled meeting on 5 June 2015. Therefore, the date of the OPEC cut could be sometime around the second quarter of 2015.

4. Will oil prices recover?

Yes—if we assume a pickup in demand, a slowdown in shale growth and a cut from OPEC. Even then, things might get worse before they get better. The market is likely to be oversupplied in the first half of 2015 (see Table 2 where I modify the IEA’s projections using my assumptions).

The implication is that the average price of oil is expected to be around $60-70 in the first quarter (Q1) of 2015, before reaching a low of $55-65 in Q2 as inventories build up. A seasonal recovery in demand and a slowdown in supply growth in Q3 are projected to lead to a drawdown of inventories, with the price recovering to around $65-75. The momentum is expected to continue into Q4 when the price is forecast to settle near its equilibrium level of $75-90. Overall, the oil price is expected to average $69 in 2015.


  1. These seem like sensible forecast assumptions. How do you think storage factors into production levels and the quarterly price forecasts - China for example seems to be using the current low prices to stockpile.

    1. I am assuming the current level of inventories is already reflected in the prices. If China continues to exploit the low prices to build up more inventories in the future, then this should create additional demand for oil above what is assumed.

      Do you think the market has fully priced in China's stockpiling ?