2013 June 21

The Master Resource Report  2013-06-21

IEA Medium-Term Gas Market Report

In the IEA report it made this somewhat amazing forecast about the rapid uptake of natural gas as a transport fuel and its impact on oil demand.

Thanks to abundant shale gas in the United States and amid more stringent environmental policies in China, gas is expected to do more to slow oil demand growth than electric vehicles and biofuels combined.

The IEA went on to forecast that the application of natural gas to transport use will be a major driver of demand, “accounting for 10% of gas demand growth, driven by China and the United States.”

This forecast of course assumes abundant supply at low prices which may prove to have been a very brave assumption.

One thing is clear, there are great opportunities in natural gas around the globe. The trick of course is how to make money and avoid as many of the inevitable pitfalls as possible. Just like the dotcom boom of the late 1990’s the forecasts for what the internet would be are largely coming true but that doesn’t mean that investors back then made any money on those forecasts. The IEA may be proven generally right with its forecast while the timing and the details could be far off the mark. Keep that in mind when committing your capital.

Oil price forecast

As readers of the MRR know we do not make price forecasts. However, that doesn’t stop us from reporting what others are willing to forecast.

Bernstein Research recently gave a very good report on US tight oil production and its potential to shape both the domestic and global oil markets. Among their conclusions was a forecast for both Brent and WTI thru 2020 illustrated in this graphic. It should be emphasized that their view stands in stark contrast to the current market view represented by the forward curves of both Brent and WTI on the graph.

Their arguments supporting this forecast are well thought out and match with the data that we have examined independent of their work. However even the best supported forecast can be thrown into complete disaster when global economic conditions shift dramatically such as during 2008-09. One such event that could undo this forecast would be a hard landing of the currently slowing Chinese economy. Seven years is a long time and a lot can happen. Just think back over the last seven for a refresher.

The other risk to this forecast is the potential market penetration of natural gas into the transport sector highlighted yesterday in the IEA gas report mentioned above. This view is the one also being heavily promoted by Citigroup that has been covered frequently by MRR.

Bernstein oil price forecast compared to futures curve

One last thought on the forecasting of future prices of oil and energy in general. Imagine making long-term capital investments dependent on fuel price such as aircraft, trucking or marine shipping equipment. Do you go with the forward curve or the Bernstein analysis? Which would you use?

This week’s report includes some further observations from the Bernstein report in our review of the latest Bakken data.