Oil Market Report January, 2015

Predictions, predictions, predictions! Usually at this time of year Portland focuses on where the oil markets will go for the next 12 months, but after last year’s grand failure (“prices will be stable”, “don’t bet on a big price fall” etc, etc!), does anyone really care what we think? Of course we’d like to point out that for the 5 years prior to 2014, we got things pretty well bang-on. But as every punter should know, the tipster is only as good as their last prediction and on that basis, we will avoid giving too many bold predictions. Let’s face it, we don’t know where oil prices will go and nor does anyone else.

Despite this though, be assured that the predictions will keep coming from other quarters, as there are no shortages of high level tipsters out there – most of whom have got things very wrong over the last 3 months. At the beginning of November, BNP Paribas confidently predicted that oil prices would probably be back at the $95 level by Christmas (they were below $60). In November, the International Energy Agency indicated that oil production would increase in 2015, but then came back in December suggesting that actually it might decrease. Best of all, the geniuses at Goldman Sachs declared this month that their new price prediction for the year was $50 per barrel. This after telling the world at the beginning of December that crude would be $80 per barrel. More staggering still was the fact that when Goldman made this announcement (“prices will be low” – gasp…shock horror!), the oil markets actually reacted (downwards) to the news! Someone is going to have to explain that one to me. Why would anyone, buying or selling oil, do anything based on a statement from a company that 30 days earlier got their price predictions so spectacularly wrong? Ho hum…

Portland is yet to meet anyone who predicted a $60 drop in prices back in the Autumn of 2014, although many observers did predict that the boom in North American Shale would at some point put downward pressure on oil markets (including Portland – see our January 2014 report). But a $60 drop?! In 5 months?! When demand for oil continued and continues to rise?! Nope, once prices dropped below $80 per barrel the huge price drops we witnessed had all the hallmarks of a speculator driven rush. That is to say that it became easier to make money through “shorting the market” (taking bets that pay out if the oil price falls), rather than spending time on any fundamental supply and demand analysis. Such activity would normally generate significant media and press coverage – after all, individuals playing fast and loose with the oil price tend to get pilloried fairly rapidly – but this time the speculators were pushing prices down so nobody was particularly interested in that angle. There was certainly nothing in the media to suggest that a halving in the oil price might be the result of something in addition to straight-forward supply and demand.

So is there anything that can be predicted with confidence in 2015? Well two things actually. Firstly London’s IP Week in February will be a slightly more downbeat affair than normal and secondly, for the first time in years, European Refiners may actually have a decent time of it. Have a look at the attached graph which shows Refinery Margins going back to 2003 (Refinery Gross Margins are defined as the difference between the sale price of refined products versus their crude source costs). As a basic rule of thumb, when Refinery Margins are below $20 per barrel, refineries don’t make money which basically means that refineries have been loss-making ventures in 8 of the last 11 years. That’s why so many have closed across Europe in the same period. But look at the “salad days” of 2008, when the world financial crisis hit and crude oil prices plummeted. Refinery Margins were (very) strong at this point as raw materials were cheap but refined prices were slow to follow suit. So if there is to be one winner (from within the industry) who will benefit from the massive downward adjustment in crude oil prices, then it will be the refiners and looking back over the last 11 years, who could begrudge them a rare dose of profitability?