Oil & Gas – Macro Outlook: Current prices are not sustainable

Oil & Gas – Macro Outlook: Current prices are not sustainable

Published on 14 January 2015

The oil market was late in appreciating the significance of the shale revolution and slowing demand growth. Arguably, however, the 50% plunge in prices in the second half of 2014 was excessive and is setting the scene for a rebound. Sub $60/barrel prices are below fully accounted costs for a wide swathe of projects. Sharp investment cutbacks are likely, which is particularly relevant for high depletion rate shale oil producers. The price trend may remain soft during early 2015 reflecting a continuing supply surplus. By the second half, however, we would expect a firming tendency once the significance of financing constraints and likely slowing US production growth are assimilated. Medium term, we believe a price ceiling could emerge at $75-80/barrel given the new found elasticity of supply through shale development, capacity additions in Brazil, Canada and Iraq and structural issues slowing demand growth.

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