Brace for Higher Oil Prices

 | Dec 26, 2013 | 1:00 PM EST  | Comments
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For my last column of 2013, I'll give a few predictions for the energy markets for 2014 and one in particular where I am almost alone among the energy analysts out there: oil will see significantly higher prices in 2014.

Most analysts I read see the fundamental picture in oil from a U.S.-centric point of view. They believe that an increasingly strong production trend from the oil shale plays here in the U.S. from the Bakken, Eagle Ford and newly-developing Permian basin, coupled with an increasing efficiency and demand slackening here will result in lower prices. I don't think they could be more wrong.

Forget for the moment the financial metamorphosis taking place in oil trade, moving it decidedly from the control of investment banks and single-manager fund operators to the megalopolis state-supported and unregulated oil firms like Rosneft and the dominating trade companies like Glencore -- this trend is worrying for a number of reasons and will almost certainly impact the global price of oil upwards --- but perhaps that subject is better saved for another column.

Instead, let's look fundamentally -- geopolitically -- at the global oil picture for the near future. You cannot help but see nothing but risks on oil price to the upside.

Sure, the U.S. is generating a new and amazing supply of high-quality, low-sulfur crude oil. But even best-scenario estimates for that production will bring daily production of crude (not counting liquids) to perhaps close to 8.5 million barrels a day in the next 36 months, a significant rise from the low production of a little more than 5 million barrels a day less than 10 years ago, and an accomplishment to be recognized. 

But remember that global demand for crude oil is approaching and sure to exceed 90 million barrels a day and is continuing to grow, while production of oil outside the U.S. is nowhere near as supportive as the shale revolution we have been experiencing here. Prices for crude continue to be balanced on a knife's edge to the combined production levels globally. Recall the spikes in price from the loss of small production areas in Libya and Syria (and Iraq) and you'll get a sense of the delicacy of the global market. Let's look at some of those stressed producing areas around the globe outside of the U.S. and their prospects for 2014 and beyond.

Iraq is now likely to plunge into complete civil war, the extent of which will determine their oil output for 2014 and beyond. Kurds to the North are forging independent ties with Turkey, while the U.S. recently began supplying drone arms for the Talabani government in Baghdad to again fight Al-Qaeda terrorists. I believe this is where we came in more than a decade ago.

POTENTIAL OUTPUT RISK: 5M+ BARRELS

Libya is running literally two governments, the recognized one in Tripoli and the Eastern insurgents, who control virtually all of the oil resources in the nation. How much oil has been getting out of Libya? Depending on who you speak to, it's either zero or a few hundred thousand barrels, but well below the potential production threshold

POTENTIAL OUTPUT RISK: 1M+ BARRELS

With Iran, there are lots of hopes and dreams that diplomacy on nuclear arms aspirations will lead to a renaissance on production, now at all-time lows due to the destruction of credit markets by the application of economic sanctions. I am convinced that these negotiations will ultimately fail and/or the Iranian government will not sufficiently convince outside oil producers from making significant investment in new infrastructure. At the very least, new Iranian oil barrels are several years away from the market, if they ever arrive.

POTENTIAL OUTPUT RISK: 3.5M+ BARRELS

Egypt is the home of the Arab Spring and has given oil companies the willies. The largest of them have been banging on the door of the latest government there for payment on production and getting little in reply. Recently, the Egyptians came up with $1.5 billion of owed money on a total bill topping $6 billion. Being a deadbeat is one thing, but constant risk of oil terrorism is another. Apache (APA) recently decided enough is enough, selling at a discount their Egyptian assets to Sinopec.  Are the Chinese the right partner in Egypt to advance production? We'll see.

POTENTIAL OUTPUT RISK: 1M+ BARRELS

I could go on, but probably the most important producer I've yet to mention is Saudi Arabia, now at a full-tilt production boogie of more than 10 million barrels a day, clearly still controlling the swing production needed to make up shortfalls (or reduce production supporting prices) when demand doesn't coincide precisely with supply. With their recent unhappiness of negotiations with their natural enemy Iran and feeling militarily at risk at virtually every border, it is not a guarantee that the Saudis will be as willing as they have in the past to moderate or pick up the slack for a consistently volatile energy market in 2014 and beyond. The Saudis still hold the golden ticket to global oil prices and they feel less appreciated for that than ever.

POTENTIAL OUTPUT RISK: 10M+ BARRELS

It is with all this in mind that I continue to believe that oil is in 2014 and in general, headed higher. No one can predict when a geopolitical dust-up will occur or how serious it will become. But with output and demand so tightly balanced, you can predict that any such tension will lead one way: to higher oil prices. 

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