20180530-NATIXIS-Is_there_a_risk_of_oil_prices_becoming_very_high__8页_789kb

Flash Economics Summary

Core Content

This document, titled Flash Economics, analyzes the potential for oil prices to become very high in the years 2019–2021. It outlines five main determinants of oil prices and concludes that the scenario of very high oil prices is plausible due to a combination of geopolitical tensions, strong global demand, limited US production growth, strategic behavior by Saudi Arabia and Russia, and reduced investment in exploration and production.

Main Determinants of Oil Prices

1. Geopolitical Factors

   • Tensions in the Middle East, including the US withdrawal from the Iranian nuclear deal and sanctions on Iran and Russia, are contributing to higher oil prices.
   • Sanctions on Iran are expected to limit its oil production, thereby increasing global oil prices.
   • The short-term price elasticity of global demand for oil is very low (-0.05), meaning demand does not respond significantly to price changes, making price increases more persistent.

2. Changes in Global Demand for Oil

   • Global demand for oil is growing rapidly, driven by expansion in transportation, petrochemical production, and overall economic growth.
   • The growth in demand is now outpacing production, leading to a tightening oil market.

3. US Oil Production

   • The United States is a major source of increased global oil production.
   • However, even with rising oil prices and renewed investment in shale oil, US production is not sufficient to offset global demand.
   • The lag between investment and production is shorter for US shale oil compared to conventional oil elsewhere.

4. Behavior of Saudi Arabia and Russia

   • Saudi Arabia and Russia have agreed to reduce production to support higher oil prices.
   • Saudi Arabia aims to improve its public finances and stage a high-priced IPO for Saudi Aramco.
   • Russia seeks to increase its foreign exchange reserves and economic growth.

5. Investment Effort in Exploration and Production

   • The sharp decline in oil prices in 2014 led to a significant reduction in investment in exploration and production, which has not yet been fully reversed.
   • The lag between investment and production means that current low investment levels will affect future production capacity.
   • Outside the US, oil production capacity is expected to remain subdued for some time.

Key Information

• Oil Price Trends: Recent oil price increases have not translated into strong expectations of future price rises, as measured by futures prices.
• Market Tightening: The gap between demand and production growth is widening, contributing to upward pressure on prices.
• Economic Context: The low price elasticity of demand and geopolitical instability are key factors that could lead to sustained high oil prices.
• Investment Lag: The delayed impact of investment decisions on production capacity means that the effects of the 2014 price drop are still being felt.

Conclusion

The document concludes that the scenario of very high oil prices from 2019 is consistent with the current geopolitical, demand, and investment dynamics. It emphasizes that while the situation is complex, the combination of these factors suggests that oil prices may remain elevated in the coming years.

Disclaimer

• The document is intended for professional and qualified investors only.
• It is confidential and cannot be disclosed without prior consent.
• The information is not a personalized investment recommendation and does not consider specific investment objectives or financial situations.
• No liability is accepted for the accuracy, completeness, or relevance of the information.
• The views expressed are those of the authors and may differ from those of Natixis or other entities.
• The document is subject to regulatory restrictions in various jurisdictions, and distribution is limited accordingly.