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The 2014 oil price crash A journalist’s view
Kevin Allison
Santa Fe Institute
Aug. 13, 2015
Firstname.lastname at thomsonreuters.comTwitter @kevinallison
About me:
30 columnists and editors around the world Agenda-setting financial insight Numbers-driven. Many columnists have finance background Timely views, rather than news Audience: global financial elite
The story:
Crude prices plunged more than 50% in late 2014. Before the crash, many forecasters had assumed that oil would stay above $100 per barrel for the indefinite future. In fact, a combination of technological disruption and political pressures left the price of the world's most important commodity vulnerable to sudden collapse.
Questions:
Are current low oil prices just a blip, or have we entered a new weaker price regime for crude?
How might a better understanding of the deeply complex underpinnings of energy markets have helped experts make better predictions?
What drives oil prices?
Industrial supply/demand
Geopolitics
Money supply Financial markets
Oil prices – recent history
$ per barrel of Brent crude. Source: Reuters Eikon
Libya civil war
Iran embargo
Recovery
Financial crisis and recession
Credit bubble
Start of US shale boom
Chinese demand surge
2014 crash
Fed signals end of quantitative easing
Source: US Energy Information Administration
Shale oil boombegins
+ 50%
Like adding another Iraq to global oil supply
Supply shock: U.S. shale revolution
Shale 101
Source: US Energy Information Administration data.
U.S. shale in context
World ex-U.S.
U.S.
“OPEC’s swing producer, Saudi Arabia, might have to cut production sharply to keep prices above $100 a barrel.”
“Longer-term, if the Saudis are unwilling to keep bearing the brunt of forgone production, or if the shale revolution spreads, oil prices might become more vulnerable to a sudden collapse.”
- Breakingviews, December 2013
The big loser: Saudi Arabia
Talk of ending U.S. crude export ban
Saudi Arabia signals oil strategy shift
OPEC says will not cut production to prop up prices
Banks cut Chinese growth forecasts
Iran nuclear deal struck
U.S. oil rig count falls
Quantitative easing ends
$ per barrel of Brent crude. Source: Reuters Eikon
Oilpocalypse Now
Source: Bernstein Research
“Last year’s collapse in oil prices was not built into the forward markets. Nor was it predicted, even as an outside possibility, by economists and oil analysts.”- Financial Times, Feb.
2015
Industry and markets blindsided
Typical Wall Street view, April 2014:
Financial crisis panic selling
Eerie calm
Low oil price volatility in the months before the crash.
Brent crude historical volatility. Source: Reuters Eikon
“Oil’s eerie calm cannot continue” – Breakingviews, May 2015
Source: EOG Resources Inc company reports
Increasing returns to shale
Source: EOG Resources Inc Q1 2015 earnings presentation
Increasing returns to shale
Counter arguments:
1. The market underestimated the importance of shale drillers’ increasing returns to scale before the crash and it’s still underestimating them now.
2. Other long-term pressures bearing down on fossil fuels have the potential to catch the market off guard just like shale did.
Conventional view: Shale drillers will struggle to maintain output at current low prices. As weaker producers cut production, prices will recover to around $80-$90/barrel, perhaps over the next year or two.
Blip or regime change?
Longer-term pressures:
Spread of shale revolution (Argentina, Russia, China)Falling cost of PV solar and battery storageNew financing mechanisms (e.g. residential rooftop solar)Increasing interest in energy efficiencyMore aggressive climate action – will public opinion hit a tipping point?
Rapid technological and political shifts can up-end forecasts rooted in linear thinking. This is, ultimately, is a good thing.
Source: International Energy Agency
Conclusion:
Santa Fe Institute
Aug. 13, 2015
Special thanks: John German
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Questions?
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