Prices of oil and gas still experiencing major fluctuations

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Three pumpjacks in an oilfield

Prices of oil and gas still experiencing major fluctuations

  • Market fundamentally unchanged, despite recovering oil prices.
  • Oil industry uneasy as it seeks a new balance in supply and demand.
  • Low gas prices caused by global effects, potential difficulties with output.

Oil prices on the up

Oil prices have recovered strongly since the beginning of the year, confirming ABN AMRO’s belief that they had fallen too far and too rapidly. Having plummeted, by mid-January, to the lowest point since March 2009, prices once more began to climb and eventually exceeded 60 dollars per barrel: a 35 percent increase over a matter of weeks. Factors causing this recovery, ABN AMRO believes, include the improved economic performance of the eurozone, the additional demand for oil for stockpiling and the drop in Libya’s oil output and exports. ABN AMRO expects the average oil price over 2015 to be 60 dollars per barrel, rising to 75 dollars per barrel in 2016. Despite the rapid decline in the number of drill rigs in the United States, oil output continues to climb steadily while efficiency is improving at the same time. ABN AMRO also highlights the increasing practice of combining oil and gas production: with gas production available as an alternative, less profitable sources are no longer automatically decommissioned when oil prices fall. However, ABN AMRO expects the increase in oil output in the US to slow down, though this will not be noticeable for some months yet.

Prices fluctuating as the market seeks a new balance

ABN AMRO believes that it is premature to conclude that oil prices will fall no further. Fundamentally, the market remains unchanged, at least for the present, compared with the situation some weeks ago. In this supply-driven market the surplus of oil continues to impose a ceiling on oil prices. ABN AMRO does not expect the excess output to diminish until the latter half of the year: output has continued to rise in the US, and on balance the OPEC countries do not appear to have cut back their output either. While the search for a new balance in oil prices continues, volatility will likely remain high. If the stockpiling demand begins to drop, if economic data appear to be taking a downturn and/or if the output exceeds expectations, oil prices might once again come under immediate pressure.

Movements on the gas market

Gas prices are in an unusual state at present. They are very low, not only in Europe, but also in the US and Asia, forced down by the mild weather, the large stockpiles and the availability of alternatives. Gas prices are particularly low in the US, in fact coming close to where they were in 2012 when lack of profitability led producers to cut their output. Despite the slight boost in prices caused by the cold front on the US east coast, ABN AMRO feels it would be unwise to discount the possibility of further pressure on gas prices in the near future. However, the bank does not believe that prices will remain structurally much lower. Elsewhere gas prices are also under pressure. Asia, for example, is experiencing a gradually decline in the demand for gas (LNG), while in Europe – where the geopolitical tensions are easing, stockpiles remain ample and the supply of LNG gas is increasing – gas prices are falling sharply. As a result, they are at the lowest levels in more than four years. The decision by the Dutch authorities to impose a lower limit on the gas output in Groningen led to profit-taking on recent drops. ABN AMRO expects TTF gas prices to experience a decline over the coming years; however, political decisions about gas output in the Netherlands might change this.

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