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Alexander Khurshudov: the price for oil will continue to grow slowly this year

Alexander Khurshudov, the Oil and Gas Information Agency exp
January 08/ 07:57



My first forecast for the oil price for a year ahead proved to be correct. The Brent quotes as of the year end were $66.87, within the forecast interval of $63-81 (see pic.1). This inspired me to do the following experiment.

Pic. 1

As before, I am using the average monthly chart. It shows a well-defined growing trend with the prices near the top of the trend. Above it there is a strong resistance of $69.5, the price bounced from in May 2015. I suppose it won’t be overcome on the first try this year too. Consequently, we should expect a down movement in January-February. If we continue this trend till December, we’ll have the expected price level of $62-81.

Here we are! A year passed but the target price remains the same. How come? That’s because a year ago the growing trend was quite new, we defined it by four points with some uncertainty. The summer decrease and the increase in December gave us some more information and the trend turned out to be smoother. 

If in a year’s time the price reaches the middle of the trend channel ($71.5), the increase rate will be moderate – 6.9%. Let’s see what factors may slow it down. The most obvious is the shale oil production in the US (pic.2), which reached 5.03 mln bpd in November.  

Pic.2

However, drilling for oil has not been growing for half a year now. In the four largest fields there are 5,397 uncompleted (temporarily suspended) wells. If they are commissioned, there will be no need for drilling for half a year. Though the cost of their completion is about $19 bln, and the credit record of shale companies is largely jeopardized. A year ago it was common to say that the oil companies are suspending the wells waiting for the oil price to grow. These talks have died out now since the price has grown 2.3 times from its minimum, but the number of suspended wells has grown by 30% at the same time. I tend to think that these wells are less productive and they will be commissioned when the production in the fields will start to fall.       

At the same time the number of oil wells in the shale formations has reached around 60 thousand. A good half of them is already producing little oil, but it is still possible to do something about it, like stop water flow, drill sidetracks and thus prolong their life cycle. I think a slow increase in shale oil production may last for another 6-8 months followed by a gradual decline.

Other factors that may break the trend are shown in the table. Compared to last year there are fewer of them. The fights in Syria and Iraq are finishing, the tensions in Iran as well. The political stand-off in the US is dying. There is still a little suspense around the possible prolongation of the OPRC+ agreement. Though, the oil exporters don’t have many reserves to increase the production.        

The table shows that the probability of breaking the trend is 27%. Naturally, this is a very coarse estimate, new circumstances yet unknown may turn up.

The stock exchange does not believe in the price increase. The December futures for the Brent trade at $64.23 and for the years 2021-24 at $57.5. However, they grew by $2.5-3 in the last two weeks.

It turns out that this year the oil price will continue to grow, but the growth will hardly be explosive. It’s fine with us. There is absolutely no rush.

 

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