(EnergyAsia, May 17 2013, Friday) —Uncertainty over the global oil demand outlook combined with strong non-OPEC supply growth is putting downward pressure on oil prices with possible impact on investment decisions in the short-term, said Ernst & Young.

In the absence of any supply or geopolitical shocks, oil prices will be swayed by economic data, which of late has been negative on sentiments to erode some of the investor confidence that was apparent earlier this year.

“The lack of strong economic signals means that Brent oil prices will likely fluctuate within a US$105 to US$115 per barrel range in the second quarter,” predicts Dale Nijoka, Ernst & Young’s Global Oil & Gas Leader.

The outlook contrasts the continued flat energy demand in the eurozone with no significant uptick expected until 2015, with the strong appetite for oil and gas in many Asian economies although slowing economic growth in export markets may curtail this demand.

Globally, consumer sentiment remains weak and is undermined by record levels of unemployment in the eurozone and a squeeze on household incomes. However, if oil prices come under sustained downward pressure, OPEC would likely respond by reducing output in an attempt to hold prices above US$100 per barrel.

“Relatively strong commodity prices are supporting industry investment for the time being. Fields that were previously assessed as being uneconomic in some regions, such as the Falkland Islands, are commercially viable again at current oil prices,” said Mr Nijoka.

He expects investment in deepwater projects in Brazil and Angola to hold up well and will be less susceptible to short-term price deviations. Decision on some projects have been helped by higher oil prices and activity related to tight oil production in the US during 2012.

Sanjeev Gupta, the company’s Asia-Pacific Oil & Gas Leader, said global economic growth remains largely being driven by emerging or developing economies led by the BRIC (Brazil, Russia, India and China) block.

Only Russia was hit hard by the global recession, while growth in India and China has stayed relatively strong notwithstanding a slight slowdown in 2012. Emerging markets in Southeast Asia are also seeing growth.

“We expect consumption and growth in Asia to continue to increase and fuel the expected higher oil prices,” he said.


Positive outlook for natural gas

Ernest & Young continues to hold a bullish view on the long-term supply and investment prospects for natural gas markets.

Along with recent large discoveries of gas reserves around the world, the disparity in prices between the US, Europe and Asia is opening up opportunities for investors.

Mr Nijoka said: “Gas-intensive industries have gained competitive international advantage from low US gas prices brought about by shale gas discoveries. Manufacturers in other countries are now pressing their governments to expedite the exploration of their own shale resources.”

However, outside North America, he said shale gas will not prove to be a quick-fix for industrial competitiveness or energy import dependency. It will be a number of years before the investment currently being made in shale exploration delivers any meaningful volumes of shale gas.”

Mr Gupta added: “Regional differences in natural gas prices can be substantial and underpin the desirability of having ‘flexible’ LNG supply and the ability to shift cargoes to the most advantageous market.

“Despite high gas prices, which are typically linked to relatively strong oil prices, Asian gas demand has remain relatively strong, particularly boosted by the nuclear outages in Japan in the wake of the earthquake and tsunami.”


Impact of US shale revolution

The surge in North American shale oil and gas production is starting to impact global markets with more to follow as US policy-makers are weighing the arguments for and against allowing for the export of additional domestic gas supplies.

Mr Nijoka said: “We think that the volume of gas export permitted will be restricted to minimise any upward pressure on domestic gas prices. While oil and gas companies wait for a decision in the US, developers in Canada are moving ahead with plans for gas exports from its Pacific coast. However, as most of the proposed schemes are greenfield projects, they will take longer to develop and will be at a cost disadvantage compared with projects to reconfigure existing facilities in the US.”

Gas exports from North America also will face competition from proposed LNG export projects in Mozambique and Tanzania. Operators of the large discoveries in eastern Africa will continue to look to farm-out stakes to partners that can carry development costs or bring technology expertise.

Mr Nijoka said the smaller independent players that led the way in making the giant discoveries in eastern Africa will now be looking to deliver shareholder value through the farm-down of stakes or through a sale of the company.

He said: “The former management teams of these companies may form new ventures to leverage their exploration expertise in other regions. These new independents could be instrumental in making future discoveries of similar scale to those in eastern Africa and opening up new frontiers.”

Despite the attention its huge reserves have received, China is unlikely to yet emerge as a major shale player, said Mr Gupta.

In developing its shale reserves, he said China faces significant challenges including complex geology, water availability issues, lack of infrastructure, unclear or conflicting mineral rights in many regions, and most importantly, state-controlled prices.