Bernstein Research reported on Tuesday that oil prices are expected to increase from 2015 onwards, topping $150 a barrel in 2019 and 2020. According to the report, growing supplies of unconventional oil will balance prices.
Brent will increase from an average $113 in 2015 to $158 in 2020, sais the report. U.S. crude is priced at a $5 discount, almost doubling the price of oil since Brent averaged $80 a barrel in 2010.
These expectations compare with prices on the forward futures curve for Brent that are significantly lower than the current price of $115 a barrel. Brent for 2015 on Tuesday traded at about $99 a barrel, dropping gradually to $91 a barrel in December 2019.
The report disagrees with the new thesis in energy markets that unconventional sources of oil supply will soon outweight global demand growth, lowering oil prices.
According to “Global Oil Prices: At ‘Base Camp’ Before the Final Ascent”, while U.S. shale oil and Canadian oil sands have given a boost to the North American oil industry, new supplies are too small to meet the rising demand of emerging market. Shale oil is expected to constitute just 3.2 pct of global supply by 2015.
The report also says that emerging markets demand is increasing with higher wealth and mobility while the role of fuel economy in developed markets is overstated as far as decreasing demand is concerned. It adds that conventional non-OPEC supply is mature and OPEC capacity growth will likely slow down its required rate.
The report predicts that oil markets will be moderated for the next two years because higher prices slash demand and lower prices block supply. However, it says that in the second half of the decade demand will grow, non-OPEC supply will drop and OPEC spare capacity will go down.
The cost of production will back up prices. According to Bernstein, the marginal cost of supply increased to $92 a barrel on average last year. Output from marginal wells is dropping when prices go down below that level. This includes supply from the smallest U.S. shale oil wells.
OPEC will need to boost capacity by 9 million bpd from about 35 million bpd now to moderate world markets because oil demand expectations are rising from 90 million bpd now to 100 million bpd 2020.
The report notes that OPEC producers will prefer to cause deficits in world oil supply rather than in their own domestic budgets.
Moreover, Bernstein estimated that the average budget breakeven across OPEC nations is expected to increase from $94 a barrel today to $109 by 2017.
