From 1993 to 1998, Non-OPEC production grew almost by 10% with OPEC growth in production nearly 20%.\u00a0 In addition, the Non-OPEC production outside US and Europe represented the majority of the Non-OPEC production increases.\u00a0\u00a0 This is much different than 2009 to 2014 figures. Both OPEC and Non-OPEC production grew close to 8%.\u00a0 The majority of the Non-OPEC production growth came from the US.\u00a0\u00a0 The dynamics of the increasing production will lead to a different result compared to 1998.<\/p>\n
In 1998, most of the battle of production\/market share was battle within the organization.\u00a0 The Non-OPEC production was coming from a diverse group with Europe production gains representing the largest group.\u00a0 Non-OPEC gains were coming from some significant finds which took a large capital cost to develop and was going to take many years to fully hit the production peaks.\u00a0\u00a0 OPEC tried to hold the line, but they were only going to capitulate themselves.\u00a0\u00a0 The Saudi\u2019s showed the world a glimpse of producing oil near the kingdom marginal economics.\u00a0\u00a0 This was too painful for many of the members and they succumbed to over producing their quotas which realigned the market over many years given the growing Non-OPEC production.<\/p>\n
In 2014 most of the production gains is resulting in OPEC market share eroding in the largest oil demand market.\u00a0\u00a0 This is no longer a battle within the organization.\u00a0 The marginal economics for this increasing production is much higher than in 1998.\u00a0\u00a0 In addition, the profile of \u00a0this production requires continual investments versus large capital outlays to maintain and increase production.\u00a0\u00a0\u00a0 This very fact will create a dynamic response to price which was missing in 1998.\u00a0\u00a0 This is not a cure for a rebound in price over the next few weeks to months, but it will be a response which could not have occurred in 1998 without OPEC coordination.<\/p>\n
Demand<\/strong><\/p>\n The demand picture has some similarity between 1998 and now, but there are some distinct differences, just like in the supply picture.\u00a0\u00a0 The similar aspect is the fact that the first sign of market weakness stemmed from the demand concerns in the Asian economy. \u00a0The distinct difference is the development of the demand concern is much different.<\/p>\n Going into 1998, world oil demand growth was averaging a 2% growth per year with Asian demand growing by over 5% a year.\u00a0\u00a0 China was growing nearly 8% a year.\u00a0 Most pundits at the time were expecting continued growth in the region.\u00a0\u00a0 The problem I identified early on is the massive growth year after year was leading to some very large absolute numbers.\u00a0\u00a0 In examining historical growth of developing countries, it showed eventually a country demand growth slows down after 5 to 10 years of strong growth as infrastructure is needed to expand further.\u00a0\u00a0 The Asian financial crisis created a dramatic shift in demand expectations.\u00a0\u00a0 Oil producers were caught off guard as capital was spent in expectations of demand growth.<\/p>\n Going into 2014, world oil demand growth was only averaging 1.3% after the 2008 financial crisis.\u00a0 Asian demand was averaging 3.5%. \u00a0 World oil demand growth from 2011-2013 has averaged only 1% a year. \u00a0\u00a0European petroleum has been in a downward spiral since 2007.\u00a0 Unlike 1998, no one should be surprised with lackluster demand growth.\u00a0 Given the dismal demand numbers for the past few years, demand is likely to be more surprising than a production correction.<\/p>\n Putting it All Together<\/strong><\/p>\n With slowing demand growth and increasing production, a price correction becomes inevitable.\u00a0\u00a0 The price is now trying to find the price point to slow production and\/or increase demand.\u00a0 Production is going to react faster than demand.\u00a0\u00a0 OPEC made the right decision to let the prices come off.\u00a0 If they cut their production it would have created a dislocation in the supply curve and ultimately lead to a reduced revenue stream. \u00a0\u00a0In 1998, this strategy would not have \u00a0worked given the production competition was largely within the group and with the Non-OPEC production coming from large capital projects.\u00a0\u00a0 This time, we have a market with production coming from N. America which is dependent on continued capital investment to maintain production.\u00a0 We expect the market to find enough marginal wells in US and Canada around the $60-$80\/bbl range to balance the market for the next few months.\u00a0 After that, I expect the market to recover as demand will naturally rebound given the 20-30% price decline.\u00a0 I think, by next year, we will see demand much stronger than the current IEA outlook.<\/p>\n Some have asked why I skip the 2008 price correction.\u00a0\u00a0 The 2008 price change was more of a function of the global economic crisis, and I consider this an outlier in terms of fundamental supply\/demand issue in the oil market.\u00a0 However, in the presentation, I do cover the 2008 peak price and the actual prediction I made in calculating the maximum peak of the oil prices – $145\/bbl (prediction) vs. actual of $147\/bbl.<\/p>\n As noted, in my other articles on the oil markets (Crude Oil Markets not 1998<\/a> & Crude Oil Collapse<\/a>) I have a complete presentation that I can present to you and your team offering a unique perspective on the oil market.\u00a0 We take the time to truly understand the past so we can appropriately reflect on the future.\u00a0 Please do consider All Energy Consulting to offer your team insights on the oil markets.\u00a0\u00a0 The presentation includes price forecasts and explanations including a discussion on refining margins.<\/p>\n Your Over 10,000 hours of Analyzing the Oil Markets Energy Analyst,<\/p>\n David<\/p>\n <\/p>\n David K. Bellman OPEC meeting went as expected. \u00a0 There was no formal agreement to cut production in the first meeting since the price correction.\u00a0 This part is very similar to 1998.\u00a0\u00a0\u00a0Prices did their thing by falling down and now slowly rebounding.\u00a0\u00a0 OPEC is making the decision they are not the marginal barrel.\u00a0 Unlike their decision in 1997, […]<\/p>\n","protected":false},"author":1,"featured_media":28,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,26],"tags":[84,335,254,114,334,333],"class_list":["post-1414","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-oil-petroleum-products","tag-forecast","tag-non-opec","tag-oil-demand","tag-oil-prices","tag-oil-supply","tag-opec"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1414","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=1414"}],"version-history":[{"count":7,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1414\/revisions"}],"predecessor-version":[{"id":1419,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1414\/revisions\/1419"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/28"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=1414"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=1414"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=1414"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/allenergyconsulting.com\/blog\/wp-content\/uploads\/2014\/12\/supplybreakdown.jpg\" "\\"supplybreakdown\\"")
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