HOUSTON, July 22, 2014 /PRNewswire/ -- Geopolitical
unrest is impacting global oil markets, this time bringing a sigh
of relief from North American unconventional oil producers. As the
industry moved out of a relatively strong winter season, fears had
been building in an already cash-strapped unconventional
environment, that supply growth – not only from North America, but also in particular from
Libya and Iraq – would put downward pressure on oil
prices. But signs of political progress in Libya have proved fleeting at best, and oil
exports remain severely constricted, with few signs of progress in
the near-term future. At the same time, Sunni jihadists threaten a
new civil war in Iraq, putting the
aggressive production growth assumptions for the Iraqi oil industry
at risk.
North American natural gas markets remain bolstered by the
recent very cold winter that brought gas storage levels to record
lows. Despite the seasonal fall-off in demand, below normal storage
levels continue to support production growth and prices. In the
recent quarter, the North American gas industry also recognized the
US Supreme Court's support for EPA's carbon reduction strategy, and
the efforts of Congress and the US Department of Energy to speed
the approval of US LNG projects.
Mexico's road to energy reform
continues, but delays in the Mexican Congress are likely to impact
the implementation of the historic reforms. "This is an exciting
time for the energy industry with a lot of investment opportunities
being pursued by players from across the industry and beyond," said
Deborah Byers, the Oil & Gas
Leader for Ernst & Young LLP in the US. "The industry
remains confident and upbeat around the potential
opportunities."
Oil
Global oil prices moved higher in the second
quarter, supported by increasing geopolitical risk – particularly
in the Middle East and
North Africa (MENA) – despite
continuing strong North American supply gains. Markets have
tightened in the recent quarter, as supply growth outside of
North America has been minimal,
while global oil demand growth is expected to remain modestly
strong with the rebound in economic growth. Byers notes that
"We are seeing a ratcheting up of most price forecasts, reflecting
not just the increasing costs of development and production, but
also a more robust view of oil demand growth, and most-critically,
the deteriorating outlook for Libyan and Iraqi production growth."
Importantly, Iraq has been
forecasted to be the largest source of oil production growth over
the period to 2025. With the increasing unrest and uncertainty,
those growth expectations are now being challenged.
Gas
US gas producers are still taking support from the
large storage deficit, despite continuing strong gains in
production from the Marcellus and Utica Shale formations in the US
Northeast. Gas prices will likely need to remain reasonably high in
order to incentivize the necessary storage build over the summer,
but at the same time, the higher gas prices will slow the switch
from coal to gas in the power sector.
Downstream
With gasoline prices moving up seasonally
and distillate prices moderating only slightly, refiner margins
generally increased in the second quarter, despite the upward crude
price pressures. Notional cracking margins on a NYMEX 3-2-1 basis
averaged almost $22.50 per barrel in
2Q14, up by almost $1 per barrel from
the 1Q average. Average margins were up for the quarter across all
of the refining regions, with margins in the Midwest once again
continuing to be the strongest.
Oilfield services
Led by international drilling, total
global rig counts continue to show year-over-year gains. US rig
activity, which has been the global laggard in recent years, is now
also showing reasonably strong growth once again. Upstream
operators are however, becoming more cautious in their spending
plans, and while spending is expected to continue to increase in
2014, the increases (5-7%) are expected to be less than those
estimated for 2013 (8-10%). At the same time, pressures on
operators' cash flows are being reflected as pressures on service
companies to control costs.
Transactions
Global oil and gas transaction activity in the second quarter
2014 turned up rather sharply, driven largely by US midstream
transactions. The US midstream, and in particular the MLP segment,
remains the most dynamic part of the North American oil and gas
landscape. But apart the strong performance in the midstream
segment, North American oil and gas transaction activity continues
to be rather weak. However, Byers, remarked, "We are clearly seeing
that capital discipline and operating cash flow growth are driving
the strategic agendas of oil and gas companies. We are seeing a
shift from value-destructive acquisitions to value-accretive
divestments, and we think that portfolio simplification and more
strategic focus will trigger a rebound in North American
transaction activity."
About EY
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please visit ey.com.
This release has been issued by Ernst & Young LLP, an EY
member firm serving clients in the US.
How EY's Global Oil & Gas Center can help your
business
The oil and gas sector is constantly changing. Increasingly
uncertain energy policies, geopolitical complexities, cost
management and climate change all present significant challenges.
EY's Global Oil & Gas Center supports a global network of more
than 9,600 oil and gas professionals with extensive experience in
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The Center works to anticipate market trends, execute the
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Contact:
Leslie
Ellis
+1 469 375 0247
lellis@webershandwick.com
SOURCE EY