LONDON, 10-Dec-2018 — /EuropaWire/ — The announcement from the margins of the G20 that Russia and the Saudis were cooperating on oil pricing certainly gave a fillip to the oil markets. The Brent crude future rose from $58.76 per barrel on 28 November to $63.55 on 3 December. This, having fallen from $86.29 as recently as 3 October. Meanwhile, Qatar announced that after 50 years it was leaving OPEC and was planning to increase its exports of Liquified Natural Gas (LNG) to 110 million tons a year, a rise of 50%.
What does this mean for the price of energy in both the short term and the medium term? We at Cebr are currently updating our medium term world economy forecasts so the moves are particularly relevant.
A year ago we made an aggressive forecast for oil prices that had them falling to $40 by 2032. In retrospect that was probably too aggressive and it now seems likely that growth of demand in non-OECD countries will be more robust than had been assumed when we made the forecast. Nevertheless, though energy price forecasting is a dangerous game, it seems clear that at some point the competition from cheaper energy and suppression of oil demand by regulation will push prices down.
Although we have used the price of oil as a proxy for a generalised cost of energy, it seems increasingly clear that the price is fragmenting both between regions and between sources of energy. For most of the 2015-2017 there was little price difference between Brent Crude and West Texas Intermediate, the two benchmark oil prices in Europe and the US. But increasing US supply, a surplus of US coastal shipping capacity and weaker European supplies have led to a gap of nearly $6/barrel emerging between the two. This gap is expected to persist for the next two years. Meanwhile the price of LNG, which historically ran at about 75% of the price of crude oil on an energy equivalent basis, has in the past 10 years varied from 10% to 200% of the price of oil and is currently close to its 10 year average of about 35%. Increased supplies from a range of sources including fracking in the US have been responsible for this.
With increasing interconnection of the global gas market and growing complexity of the energy sector, it is likely that both price fluctuations and divergences will increase.
We now forecast that the price of oil will cycle around $60 until the mid to late 2020s before the effects of conservation and increased renewables start pushing the price down.