March 2015, Vol. 242, No. 3


Wood Mackenzie: Oil Market Concerns Inescapable in 2015

Rita Tubb, Executive Editor

Global consulting company Wood Mackenzie has drawn on the knowledge and expertise of senior analysts in compiling a new report, Horizons: What To Look For In 2015.

In discussing the report, Paul McConnell, principal analyst for Global Trends at Wood Mackenzie, pointed out that oil market concerns will be inescapable in 2015. “With no sign that OPEC is reconsidering its decision to leave production targets unchanged, the impetus falls on non-OPEC producers to limit supply growth and bring the market back into balance,” he said.

Also noted are weaker-than-expected global economic growth that could put even more pressure on prices. Oil companies will be forced to adapt, and a buyers’ market could emerge in 2015, McConnell warned. However, those best positioned to withstand weak prices could emerge as winners when the cycle turns.

Elsewhere, China remains a focus. “There are signs that this critical driver of energy and metals markets over the last decade or more is beginning to mature with far-reaching implications for commodity demand,” noted McConnell. In 2015, the behavior of the country’s consumers, the strength of the economy and the policy direction taken by the government will set the scene for energy and metals demand growth over the medium term.

Longer term, Wood Mackenzie emphasizes that deep-seated geopolitical, economic and technological trends may point to a new era of weak hydrocarbon demand growth. McConnell added, “Such a scenario represents a high-impact tail risk for energy companies in the years to come.”

Wood Mackenzie’s analysis covers a number of key themes to watch for in 2015, several of which are summarized below. You can review other highlights from the Horizons 2015 report by visiting

Oil Markets

Ann Louise Hittle, head of Macro Oils at Wood Mackenzie said, “The strength of oil demand growth in 2015 is a major concern, and a weaker-than-expected economic outlook could exacerbate the current market imbalance.”
Moreover, if a non-OPEC supply response is not enough to rebalance the market then attention will fall on the Middle East, and OPEC’s next meeting, during the summer months.

Hittle noted that after a tumultuous end to 2014, all are looking to oil markets to help determine the trajectory of the global energy industry through 2015. With a flat to negative outlook in Europe and Japan, the strength of oil demand growth in 2015 is a major concern.

“At the time of the forecast, global GDP growth of 2.7% was projected for 2015,” she explained. “We expect world oil demand to continue to expand, though at a rate identical to 2014 and markedly slower than that seen in 2013. Global economic growth below 2.7% will point to softer oil demand growth, exacerbating the market imbalance that has developed through the latter half of 2014. This will put oil prices under renewed pressure in the first few months of 2015.”

Hittle also warned that oil demand growth in 2015, even under the base case scenario, is not enough to absorb new supply that could come into the market. Thus, the nature and scale of the response to low oil prices from non-OPEC producers will be a theme from the start of the year.

“How the relationship between price and tight oil growth plays out through 2015 will help determine whether a non-OPEC supply response is enough to bring oil markets back into balance.”

Hittle said Saudi Arabia (and OPEC by extension) is not reconsidering the November decision to keep the 30 MMbpd production ceiling unchanged. However, attitudes may shift if oil prices fall to very low levels. Even so, OPEC faces a dilemma – leave production targets unchanged and suffer the potentially negative consequences of a period of very weak prices, or cut production, triggering a rise in prices and allowing non-OPEC producers back into the market.

Natural Gas

Noel Tomnay, head of Global Gas and LNG, said LNG markets face rapid supply growth led by Australia and followed into 2016 by the U.S. from the Gulf Coast. He expects suppliers to be looking closely at Asia’s gas demand growth since China’s demand grew less than 10% year on year vs. an expected 17%. “There are now real concerns that the Chinese market will struggle to absorb all of its contracted LNG, which doubles to 35 mtpa over the next three years,” he explained.

Despite the challenges China presents, long-term gas market growth prospects remain compelling, presenting opportunities for LNG and pipe gas, including supplies from Russia, in the longer term. Last fall a Memorandum of Understanding was signed between the two countries for a gas pipeline via the western route; from Western Siberia via Altai. This followed an earlier agreement for 38 Bcm to be supplied via a route from Eastern Siberia.

Tomnay said he expects China to focus on development of the eastern route before progressing discussion of the western route any further. But with relations between Europe and Russia souring to Cold War status, and Europe’s long-term gas demand growth in the doldrums, Russia will be trying to cement its pivot east with more China gas deals.
Insert Graph titlted: China annual LNG import volumes vs. Australia LNG exports

As noted in the report, 2015 sees the beginning of a period of robust growth in LNG supply, led by Australia. The Queensland Curtis LNG project recently delivered its first cargo of LNG, with three Australian projects, including Chevron’s Gorgon, scheduled to come online this year. This, in combination with China’s growing pains on the demand side, and the background of a relatively low oil price environment, will likely place downward pressure on Asian LNG spot prices at times, with implications for the global gas market.


Tom Elliott, principal analyst, Corporate, said a true buyers’ market could emerge in 2015. Corporate valuations are now heavily discounted as investors digest a sub $70 per barrel oil. Companies are weighing options and distressed sales could precipitate the emergence of a buyers’ market in 2015. Those with the financial strength to withstand weak prices will be well-positioned for the next cycle.

“A majority of the respondents from a survey conducted at Wood Mackenzie’s Global Energy Forum expects the cycle to turn in 2016-18, in line with our view,” noted Elliott. “Oil companies are set for a difficult few years. But the oil price bounce could be stronger than expected if sufficient supply is taken off the market. Corporates that are willing and able to adopt a counter-cyclical strategy will emerge as winners.”


Noting that Asia’s consumers are key, senior economist Cynthia Lim said, “China’s economy is evolving and the nature of its energy demand growth is changing. Retail sales in China have outpaced industrial production in recent years and the real estate sector has slowed. However, this transition from the investment-driven to consumption-led growth is in its very early stages and infrastructure development still has a long way to run, particularly in China’s interior provinces.

“The rise – or rather the renaissance – of the consumer is also a critical issue in Japan. Consumption comprises 60% of GDP, but so far ‘Abernomics’ has failed to drive Japan to spend more and drag the country away from multiple-dip recessions.”

Lim warned that Japan’s debt to GDP ratio has reached frightening proportions, and that a loss of investor confidence in Japan could quickly lead to higher interest rates, making it increasingly difficult for the government to service its debts. The crisis moment could be close, unless following the recent elections, the government takes on difficult but essential structural reforms. Otherwise, Japan inches even closer to a sovereign debt crisis.

Lim said she sees the behavior of Asia’s consumers in 2015 as having material impacts on the global economy.

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