2013 was a landmark year with US unconventional oil achieving many firsts. This preview of 2014 issues creates a strategic framework for the coming year.

Longtime importer, the United States, produced more oil than it imported for the first time in nearly twenty years, opening up the possibility to allow widespread crude oil exports. Another year of record refined product exports continued allowing the US to become the largest product exporter in the world. Connecting these new producing regions with existing infrastructure brought in significant investments in pipes and rail, but as the capacity struggled to keep up, midcontinent and US gulf prices dropped in the fourth quarter.

Looking to 2014, the short-term oil market team at IHS Energy Insight has highlighted the major issues facing oil markets with a focus on the unconventional. (Also see Market Intelligence Service memo to members: Oil Markets in 10 Charts).

1. Resilient US Production Growth: Will it Continue?

Despite exceptionally high production decline rates, and the lack of a third major tight oil play beyond the Bakken and Eagle Ford, actual production trends belie a surprising resiliency, with production up in 2013 by nearly 1 mmb/d. The Permian continues to grow as new horizons are drilled while GOM projects should continue in 2014, leading to stronger 2015 growth. As we monitor domestic crude production and the resultant midstream complications, we will also be closely watching company investments in exploring and proving new plays. Additionally, we expect NGLs production and exports to continue to increase as gas wells are directed toward plays with high liquids content.

2. A Tipping Point: Will the US Change its Crude Export Policy?

The United States is believed to have exported an average 100 mb/d of crude oil in 2013, a pittance compared to average imports of 7.7 mmb/d. As WTI at Cushing prices are expected to improve with the streaming of TransCanada’s 700 mb/d MarketLink pipeline and by mid-year with the streaming of the Seaway twin line, the ability of the Gulf Coast region to fully absorb all additional volumes is in question and sweet prices at the Gulf will likely remain discounted from global markers. Sustained weakness in Gulf Coast pricing, particularly as the benefits to consumers are meager or non-existent, will lead to more vocal demands for changes to US crude export policy as Congress reconvenes in January, particularly if weak prices are linked to a risk to employment growth in the producing regions.

3. Oil by Rail: Does the US Keep Moving to a Rockefeller Era?

End-2013 rail takeaway capacity from the Bakken is expected to pass 1.1 mmb/d, with a total of more than 1.5 mmb/d of Bakken rail loading capacity expected to stream by end-2014. While the majority of these rail terminals are intended to bring crude to the Gulf Coast, there are growing volumes moving into the Pacific Northwest and East Coast as well as Atlantic Canada as producers seek optionality and refiners see a potential to use lower-priced oil. But several train accidents are causing comparisons between pipeline safety and rail transportation safety with the potential for more regulations and higher transport costs.

4. Environmental Focus: Remain on Keystone or Shift?

The last two years has seen environmental groups zeroing in on the Keystone XL pipeline, using it as a rallying platform for a host of issues related to oil and carbon emissions. But there are other issues that could push environmental interests, and lobbying dollars into other areas related to energy: hydraulic fracturing (emissions, seismic disturbances, water and land use), the increased use of trains to move fuel, arctic drilling among many others.

5. Will the Oil Gas Ratio Shift?

Strong oil prices amid low natural gas prices has kept the oil to gas ratio in the United States well above historic levels for the past several years. Natural gas prices well above 2012’s doldrums and continued seasonal weakness in US oil markets could keep this ratio on a decline – potentially causing some relooks at both paper trades and investments that benefit from a high spread.

6. Economy: Does Demand Move Back to Strong Growth?

United States oil demand growth finally moved solidly out of negative territory in 2013, after years of declines (2010 growth was a rebound from the recession but still kept demand well below the starting point for 2009). At this time demand growth is not expected to reach the high levels seen in the early 2000’s. But there is a potential for further upside growth as the economy continues to accelerate, and gasoline demand showed an unusual demand bump in the early fourth quarter. While not our base case, 2014 may be the year that US demand shows an upside surprise.

7. Global Outages: More? Less? Or More or Less the Same?

Global outages reached close to 3 mmb/d in 2013, with much of it attributed to Iran, Libya and Sudan, though several other outages allowed the record high number (our oil team historically assumed that an average of 0.5 mmb/d would be offline at any one time). These outages tightened a market that otherwise should have seen too much supply in the system without an OPEC cut. The future path of the outage levels is a key factor in determining if US supply growth merely helps keep the market supplied, or tips it into oversupply, putting pressure on OPEC.

8. A Falling Call: Can OPEC Manage a Likely Decline for its Crude?

Our global oil balances show a decline in the call on OPEC of 0.8 mmb/d in 2014, a level that may require a formal production cut by the organization. The 2013 0.5 mmb/d decline was met largely through involuntary reductions from Iran, Libya and Nigeria. Repeating these declines from those countries or others is unlikely. Instead these countries will be seeking to increase production in a market already crowded by sufficient OPEC production. With OPEC members yet to show a willingness to cut even under dire circumstances for the market, very low prices could emerge should a declining call be met with rising production instead of a cut.

9. Going Global? The Next Tight Oil Revolution

2013 saw both progress and setbacks for seeing the US oil revolution around the world. While 2014 will not see any changes that immediately change tight oil production, continued high prices and a greater knowledge of hydraulic fracturing could boost efforts to open up more areas for exploration – helping to set the contours for what could be possible in the medium term.

10. The Next Oil Market Wild Card: How Unknown are the Next Unknowns?

Along with the topics outlined above, we will be focusing special attention on “wild card events” that have the potential to disrupt oil markets. Some already appear in the offing:

• Developments in the European Commission’s crude oil market pricing investigation could have major implications for market transparency under increased government regulation.
• A political solution (temporary or permanent) which allows a resumption of KRG oil exports, potentially adding 300-500 mb/d of oil to global supplies.

Other potential wild cards, and their impacts, can only be gleaned from a close analysis of the underlying structural forces at play, and could develop years later. Some, but certainly not all include:

• The map of the Middle East is redrawn politically and physically as the Arab Spring continues its still unfinished cycle.
• The high cost of oil in a time of stronger economic growth pushes consumers, companies and countries to look for alternatives.
• Political polarization in the US may have reached its zenith, but all of the effects may not yet have occurred.

Risks will always remain that an unanticipated and unsignalled wild card completely upends the oil market - either just a short burst, or an enduring change.

Posted 7 January 2014

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.