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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Citi: The Case For $45 Oil


Oil could be back to US$45 a barrel within 12 months, Citigroup’s commodities chief Ed Morse said in an interview with the Financial Post, noting that the bullish case for crude is based on a faulty analysis.

The top oil forecaster who warned about the 2014 price collapse and also accurately predicted that the OPEC+ club would end its production cut deal earlier than everyone expected, has said that the capital efficiency and technological advancements that have improved oil recovery goes against the bullish scenario, because the better the recovery rate, the more oil that can be produced on the cheap. Also, he said, the bulls make a mistake in estimating a global acceleration in total oil production decline when this acceleration will only take place in mature fields, which represent about 45-50 percent of the global total.

It is illogical, Morse said, to forecast a decline of production in places where production will not be declining, such as the Canadian oil sands. The analyst also noted OPEC as a case in point, given, he said, its ability to consistently produce an average 35 million bpd over a 50-year period.

The assumption of a decline rate of 5 percent for these mature fields yields a supply fall of 2-3 million bpd, which is about half of what bulls are forecasting based on their all-embracing assumption of production decline. Related: Can China Replicate The U.S. Shale Boom?

Citigroup’s commodities head allowed that spare capacity is a legitimate concern in global oil, but he added that deliverability is the real issue and it is actually looking good at the moment. Saudi Arabia, he said, can deliver 15 million bpd through its ports and has some 300 million barrels of crude in storage at home plus more abroad. In other words, the Kingdom could hypothetically deliver 15 million bpd, but it is only producing 10.8 million bpd.

In the immediate term, however, Morse agrees oil will continue strong. It can’t really be any other way: the supply disruption potential in Libya and Venezuela, the Iran sanctions, and the U.S.-China trade war are all arguments for the bullish case for oil and they will remain on the scene in the next few months.

Next year, however, Morse believes Brent could drop back to between US$45 a US$65 a barrel.

By Irina Slav for Oilprice.com


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  • Mamdouh G Salameh on July 25 2018 said:
    Rather than the bullish case for crude oil being based on a faulty analysis, I would say that Citi’s forecast of an oil price going back to $45 a barrel within 12 months is the one which is based on faulty analysis and assumptions and dare I say wishful thinking.

    While I accept that technological advances such as enhanced oil recovery systems and horizontal drilling have been improving the oil recovery factor (R/F), this in no way goes against the bullish oil scenario. It has taken technology more than twenty years to raise the R/F by even 2% to the current global average of 35%. On the other hand, a global depletion rate of 5-7% in mature fields is not only a well-documented fact but it also capable of sinking any future improvements in the R/F.

    The oilfields of Saudi Arabia, Iraq, Kuwait, UAE, Iran and other Gulf producers which between them contain 71.8% of global proven oil reserves are 80-98 years old having been discovered between 1921-1965. Therefore, the claim that mature fields represent 40-45% of the global total is false. They actually represent the overwhelming majority of global oil fields and they are depleting at an estimated annual rate of 5%-7%.

    By 2020, 15 mbd of new oil supply may be needed to meet a projected annual average rise in global oil demand of 1.59 mbd and also offset an annual natural depletion rate in global oil production estimated by the IEA at 5% or 4.8 mbd, virtually equivalent to losing the current output of Iraq.

    Moreover, 90% of Saudi oil production comes from four giant oilfields (Ghawar, Safaniya, Hanifa and Khfji), all of which are more than 70 years old and are being kept flowing by a huge injection of water. They are depleting profusely.

    When it comes to Saudi Arabia, it seems that Citigroup’s commodities head must have swallowed Saudi claims hook, line and sinker. Saudi Arabia has been living a big lie vis-à-vis its claims about its proven oil reserves, production capacity and spare production capacity. The Saudis sold their figures to the world and unfortunately the world took them at their word.

    They claim to have proven reserves of 266.2 billion barrels (bb). However, many experts including my own research estimate Saudi remaining proven reserves at 74-80 bb. Saudi Arabia claims it could produce 12.5 mb/d if it really needed. However, this claim doesn’t stand scrutiny. Saudi oil production peaked in 2005 at 9.64 million barrels a day (mbd) and has been in decline since. Out of 10.4 mbd they said they were producing, almost 1 mbd was not actual production but withdrawal from their oil stocks stored on board tankers and on land. Even the 400,000 b/d they claim to have added recently came from their stored oil and were not actual production. Their claim that they have a spare capacity of 2 mbd is not true.

    When the former US president George Bush asked the late Saudi King Abdullah to raise Saudi oil production in 2008 at the time prices were heading to $140 a barrel, his answer was that the oil market is well supplied. This has been translated to mean that Saudi Arabia could not add a single barrel of oil to its production of 9.5 mbd then.

    Saudi Arabia is withdrawing its IPO of Saudi Aramco not only because of risk of American litigation over 9/11 but also because no investors will ever consider buying any shares of the IPO without independent auditing of Saudi reserves.

    The Bullish case for oil prices is based on positive fundamentals of the global oil market aided from time to time by geopolitical developments around the world. These fundamentals are a global economy projected to grow at 3.9% this year and next compared with 3.5% last year, a global oil demand adding some 1.6-1.7 mbd this year over 2017 and a Chinese oil imports projected to top 10 mbd this year. I project that oil prices will rise beyond $80 a barrel before the end of this year.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Vishwas on July 25 2018 said:
    Citigroup chief missed an important point. As against increasing dependence of OPEC on oil revenue (to meet self created security and huge infra/rebuilding needs) demand for oil is decreasing. China, EU and US showed lower fuel consumptions in 2018. Demand growth from India, Africa will be much low to compensate the decline. So, the supply is going to be increasingly more than the demand for the next decade. Commercial EVs are fast changing the oil demand scenario.
  • Mike Walsh on July 26 2018 said:
    I enjoyed the Drs comment, an interesting and seemingly informed take vs citis. Does the Dr post elsewhere?

    My own uninformed view has been that the low oil prices of the last few years has resulted in underinvestment in capex which means an inevitable swing was bound to occur where demand would eventually outstrip supply. I believe this is now starting to be the case, ergo higher prices. Throw in all the global political instability and i don't see prices coming down for a long time.
  • Jace Parkhurst on July 29 2018 said:
    Dr. Salameh, very comprehensive comment, thank you. If correct, then demand is then already way ahead of supply. Only remaining question is how China’s opaque oil stockpiling plays into all of this...
  • Don on August 01 2018 said:
    Ha hahahahahaha! Remind me not to listen to Citigroup for financial advice. $45 within 12 months? Cheaper methods of extraction? This guy should stick to Frozen Concentrated Orange Juice as a commodity. There is almost no deep water exploration. Shale is very expensive, has high decline rates, and there is no infrastructure beyond roads and trucks to get it to market.

    We may see $45 oil again, but not unless other factors - world wide economic collapse, for example - come into play. It definitely is not going to be because of cheaper or more efficient production.

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