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www.fueloilnews.com | FUEL OIL NEWS | OCTOBER 2015 17 FUELS FUELS L ast winter was not bad for the industry. The prices were low for a change and the weather turned cold as the winter matured. The indica- tions are that 2015 could provide more of the same. Fuel Oil News interviewed experts for their perspective on what to expect in the coming months. We were assisted by Alan Levine and Brian Milne. Levine is the CEO and chairman of Powershouse®, a group of seasoned energy experts and broker professionals working in partnership to meet the business goals of its cus- tomers. He is an internationally recognized expert in pricing and business practices in the energy industry. A petroleum specialist for over 40 years, Levine is a highly regarded author- ity on the relationship of energy futures to cash petroleum markets. Milne the editor of Schneider Electric's MarketWire—a real-time market and news service focused on U.S. oil prod- uct markets and relevant news and analysis, and also the editor of OilSpot—a weekly newsletter on the oil markets. As should be noted, none of the projections outlined here are set in stone and individual purchasing and hedging decision should use this as simply a starting point and not the ending point in the decision-making process. Note: These interviews were conducted around September 1 and are invariably and unavoidably somewhat dated by the time they arrive in print. CRUDE OIL Crude is important to prices for the most obvious of rea- sons—it is the primary price component. The crude price war between OPEC and the emerging world of fracking production continues. The U.S. Energy Information Administration, in its latest Short Term Energy Outlook (September 9), forecasts that Brent crude oil prices will average $54/b in 2015 and $59/b in 2016. West Texas Intermediate crude oil prices in 2015 and 2016 should average $5/b lower than the Brent price. The Saudis have been suppressing prices and keeping production up in an attempt to both maintain market share and drive the fracking competitors out of business. The Saudi's recently claimed victory in their efforts, while other voices in the United States see OPEC as being on life support, if not dead. Conventional oil has traditionally been cheaper to produce, but costs are rising in many of the established production areas and shipping costs add to the mix. Further, many of these governments are heavily to almost exclusively reliant on oil to fund their national budgets, and such low oil prices represent an existential threat. The Saudi price war has been aggressive, but so has the response as the fracking industry becomes even more aggressive, and successful, at boosting efficiency. "We've seen the first indications of our friends the Saudi's crying uncle," Levine said. "What I mean by that is: Have the Saudi's been successful in their strategy? I would have to say yes if their strategy was to [permanently] lower the price, which I'm sure wasn't really what they had in mind. What you're seeing now, generally speaking, are only small reductions in output in the United States." He noted that producers now have a lower breakeven price because of the growing efficiency of current shale production. "They only have to drill one hole and then a bunch of horizontal lines from that point, and it's more like a manufacturing process," Levine said. "You can turn the thing on and off and you're not hostage to traditional things like well pressure. I don't think the Saudi's thought much about that. So I think when the prices get up to where they are now in the $40s or low $50s [dollars per barrel] a lot of folks are going to say it's time to start the rigs. So, I don't think the oil price is going to be anything like $100 per barrel again." And that is particularly unlikely in the short term. "We have a ton of crude oil supply globally and domesti- cally, and we're seeing product supply inventory—especially distillates—climbing as well," Milne said. "Domestically we have crude stocks 25% over a year ago we have distillate fuel supply 22% so these are bearish fundamentals." However, that does not mean that there will be no vola- tility, or that prices are not capable of going higher. There was a significant rally in prices in late August where prices shot up nearly 30%, with Brent topping out at above $54 per barrel. Prices have since dropped but remain in the mid-$40 range. Milne noted that the market had likely oversold through the summer as supply ramped up, the likelihood of Iranian oil coming online increased and the Chinese economic dis- ruption cast doubts on the demand side. "The market oversold there is no question about that," Milne said. "So when you see those selloffs, and some sup- port held, the thinking was that you had fertile ground for a rally. And then you top it off with some good data on the economy along with a US GDP revision of 3.7% from 2.3%—a big change—and the market just took off like a rocket." Milne foresees the possibility of WTI rallying up to the $50s and maybe even touching $60. "But having said that, the timing is extraordinarily difficult to figure out," he said. "I don't think the downside is done yet and you're prob- ably looking at another WTI visit back to the $30s. I don't think you see prices recover meaningfully until later in 2016, maybe getting back in the $60s or touching $70s. But a lot of things have to go in a certain direction for that to happen." Levin predicted the rally shortly before it happened and got the word out. He also sees higher prices in the future, but with caveats. "We just had this dramatic rally," said Levine. "One of IMAGE ©ISTOCKPHOTO.COM/LAGEREEK