Understanding Movements in Oil Prices

 

Takeaway

  • Asian demand for natural gas imports is expected to increase.
  • Currently, it is difficult to move natural gas from places where it is abundant, like the U.S., to places with a lack of supply, like Japan.
  • OPEC has much greater control over keeping prices from falling than it does over keeping them from climbing.

Well-regarded energy experts agreed that natural gas prices in the U.S. are currently very cheap as compared to the rest of the world, and that the demand from Asian countries will be instrumental in determining future prices, during the Understanding Oil Prices panel (part of the UT Energy Forum), Friday, March 3.

Due to China’s growing need for natural resources, such as crude oil and metals, and Japan (and other Asian countries') demand for natural gas imports due to a lack of local supply, and overall decline in oilfield production, the panelists agreed that demand was not looking to dip anytime soon, but simply continue to grow stronger. “Due to oil field decline, we’re going to need to produce an additional 8-10 billion more barrels per year just to keep up with current demand,” explained panelist Niloy Shah, let alone any increased demand that is likely to come.


Panelists included (left to right): Roger Ihne, Principal and Energy Portfolio Leader, Deloitte; Jeff Bartlett, Energy Portfolio Manager, Apollo Global Management LLC;Niloy Shah, CFO, Gulf of Mexico Region, BP; Jason Schenker, President and Chief Economist, Prestige Economics LLC; and Moderator Sheridan Titman, Professor and Director of EMIC, McCombs School of Business, The University of Texas at Austin


Based on the latest University of Texas Energy Poll, energy consumers aren’t likely to appreciate the impact that this increasing demand on natural resources will have on energy prices. Poll respondents tended to suspect that the pricing power of energy companies and/or electric companies, global politics and government regulation have the most impact on the prices they pay for energy. However, the panelists agreed the primary driver of the energy prices consumers actually pay are directly related to supply and demand in the energy markets, particularly the oil markets where the relative ease of transporting crude translates to a global market that sets prices.

Currently it is difficult to move natural gas from places where it is abundant, like the U.S., to places with a lack of supply, like Japan, due to a lack of facilities that can liquefy natural gas so that it can be transported on ships. These liquefaction facilities are expensive and take years to construct but there are plans to develop the ability to export natural gas which would likely raise price in the U.S. and reduce them in Asia.

Granted, the lines between these different effects on energy prices can get blurry. For example, OPEC straddles a few of the categories in the poll (being somewhat global, governmental and supply-sided in nature), and definitely affects oil prices and related energy markets. “When oil went down to $36/barrel, OPEC took 6 million barrels off the market,” Shah explained, “and they seem to have a price ceiling of about $80/barrel.”

However, in actuality, OPEC has much greater control over keeping prices from falling than they do from keeping them climbing, which would also be bad for their business in the long run. Panelist Jeff Bartlett also commented that the "Arab Spring” events caused increased pressure on governments in the Middle East to improve programs for their citizen’s welfare. These improved programs are more expensive and create a desire for higher oil prices in the region, suggesting OPEC has a stronger incentive to keep prices high, but not too high. 

Ideally, what OPEC truly wants, panelist Jason Schenker asserted, “is the most amount of money they can get, without incentivizing green technologies, and killing the golden goose.”

Though no one can predict the future, Bartlett pointed out that, given China’s demand for metals has doubled in the last seven years, he would not be surprised if oil reached $150/barrel in the next five years.

Similarly, panelist Roger Ihne expects a more robust range of $4.50-7.00 range for natural gas in the U.S. in five years. Natural gas prices are so low right now, producers aren’t really making much money on the gas, per se, but they are still drilling in places where the gas is a byproduct of oil, which is still commanding high prices. But, as Ihne noted, “Using natural gas in the transportation fleet would be the holy grail for natural gas providers…and there are a lot of game changers on the horizon.” Large opportunities may loom for its use in commercial and transportation fleets, and with new technologies, like those that can turn natural gas into ethanol. 

Bartlett agreed, noting that he forsaw that “movement in the next five years will come primarily from moving from coal plants to natural gas."

 

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