Outsider Club

2014 Oil Price Forecast

Crude to Average $104.50

By Nick Hodge   

There's no reason to beat around the bush...

Several trusted research firms, organizations, and governments of oil-producing countries are already out with their forecasts for crude oil prices in 2014.

So I'll give them to you straight, along with their reasoning — and then include my take on them.

Here are three West Texas Intermediate crude oil price forecasts for 2014: 

Agency/Year

2013

2014

2015

U.S. Energy Information Administration

$97.00

$93.00

 

Reuters Analyst Poll

$97.80

$98.80

 

Norwegian Government

 

$92.40

$81.73

You can add $6 to those prices to get Brent Crude price forecasts, as that's expected to be the spread throughout 2014.

 

That gives us a 2014 West Texas crude oil price forecast of $94.73 and a 2014 Brent oil forecast of $100.73.

Here's what that would look like:

2014 Crude Oil Price Forecast

Oil Forecast Reasoning

The EIA is forecasting lower crude prices to reflect "the increasing supply of liquid fuels from non-OPEC countries." It also points to the completion of several pipeline expansion projects that will reduce the cost of transporting crude.

A survey of 30 analysts by Reuters concluded that unrest in the Middle East would put a floor under prices for the remainder of 2013, but that increasing U.S. oil supply and a stronger dollar, driven by the tapering of quantitative easing, will push prices lower in 2014.

The Norwegian government, via Prime Minister Jens Stoltenberg, said its lower projections were due to higher supply from the U.S. and lower demand from China.

Dark Side of the Crude

I've been an outspoken critic of the U.S. shale boom ushered in by advances in hydraulic fracturing, or fracking.

I'm not opposed to the practice; I think fracking is a vital tool in the oil production shed.

Instead, I've warned that fracking isn't a price panacea: Yes, it will greatly increase production... No, it won't greatly reduce prices.

Indeed, Wall Street research company Sanford C. Bernstein has discovered a rapid increase in the marginal production cost of shale oil. What cost $92.30 per barrel to produce in 2011 cost $104.50 to produce in 2012, a 13% one-year rise.

Take a look:

Marginal Cost of Global Oil Production

Bernstein calls this "the dark side of the golden age of shale."

Christophe de Margerie, CEO of French oil giant Total (NYSE: TOT), echoed that sentiment, saying that improved technology is not reducing the marginal costs of the oil industry: "What we call technological barrels are day after day more expensive."

That's concerning, given the International Energy Agency says 40% of new oil production capacity over the next five years will come from North America (65%, if you count just non-OPEC supply).

So there's a conundrum.

Large supplies of North American oil should be putting a cap on oil prices. But at the same time, their high marginal costs are also putting in a price floor.

According to Sanford C. Bernstein:

Net income margins in the sector are now at the lowest in a decade. This is not sustainable. Either prices must rise or costs must fall.

But that's not entirely true. Things can stay the same...

And that's why I like OPEC's crude oil price forecast, as put forth in its most recent World Oil Outlook:

This year it is assumed that the OPEC Reference Basket (ORB) nominal price re- mains at an average of $100/b over the medium-term, before rising with inflation to reach $120/b by 2025.

If you pressed me for a specific number, I'd have to revert to the marginal cost figure of $104.50.

Should oil prices get much cheaper than that, U.S. producers will have to limit production and prices will rise (just like gold).

Should they get much higher, the world would enter recession, as energy prices grew too expensive to sustain growth. 

Either way, shale companies will be in a precarious place when it comes to profitability.

It's important you invest in the "picks and shovels" of the fracking boom.

Additionally, I cover the nuts and bolts of selecting companies for investment in the brand-new book, Energy Investing for Dummies, which hits shelves next week. You can preorder a copy with this link today.

Call it like you see it,

Nick Hodge Signature

Nick Hodge

follow basic@nickchodge on Twitter

Nick is the Founder and President of the Outsider Club, and the Investment Director of the thousands-strong stock advisory, Early Advantage. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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