Former Shell President John Hofmeister said Tuesday morning on CNBC that 1Q16 will likely be the “roughest quarter that the oil and gas industry has seen in a long time.” The recent further decline in oil prices is no surprise, he said, adding that market observers should expect the oil market to get worse before it gets better.
The depressed price environment will continue for some time as long as Saudi Arabia continues to tap into its deep reserves and borrow money to finance its policy of maintaining oil output, Hofmeister said.
Watch the interview here:
Oil markets will only achieve a more rational level of output when state-run firms bring production in line with slower world fuel demand, he said.
But once a correction occurs, Hofmeister said, he worries that the oil market will not realize equilibrium, but instead enter a time of undersupply, eventually yielding a price increase.
He said that this is because companies are destroying value as they hurry to reduce costs to offset falling revenues. The O&G sector is laying off workers and reducing inventories, “cannibalizing” parts from idled rigs and equipment, and therefore leaving companies unprepared for an increase in demand, he added.
Hofmeister also believes US drillers will have a difficult time borrowing capital to finance new production.
The fall in high-cost U.S. crude production – expected to drop by around 500,000 bpd in 2016- could be the turning point in the supply-demand imbalance, Hofmeister said.