#What####Holds##for##The###oilgas##Industry# #oilprices #supplydemand #industrydownturn

By 12th December 2015 Industry News No Comments

Trying to predict the future trends of oil prices is difficult and most of the time the results are disappointing, especially when we ignore the facts and figures and rely on hope and wishful thinking. A year ago following OPEC’s decision not to cut oil production and keep the oil market oversupplied, many oil industry experts, analysts and CEOs were expecting oil prices to recover in a short time. Hence, the oil and gas industry’s reaction to the current downturn was not as fast as it should have been and the consequences in many cases were catastrophic.

A few days remain to officially close the door on 2015. As the eagerly awaited December 2015 OPEC meeting is over, and as the outcome tells us that the cartel is not going to cut back its current actual output level unless non-members cooperate in doing so, many questions have arisen concerning the oil and gas industry and whether 2016 will be another 2015 or a better year. Where will oil prices be in 2016? How will the 2016 supply and demand outlook look, and could it change the course of events? In general, what will 2016 hold for the oil and gas industry? Such questions are what many oil and gas companies, investors and professionals want answers to. Here few answers:

Where Will Oil Prices Be In 2016?

It is definitely unrealistic to simply state a number. However, looking at the big picture and taking into account the long term goals of both OPEC and non-OPEC producers, a price range can be specified.

On the one hand, OPEC is currently focused on protecting its market-share and squeezing conventional oil producers’ rivals out of the market – that is unlikely to change. On the other hand, the long term goal for non-OPEC producers such as U.S. shale oil producers is obviously surviving the current low-oil-price environment through cost-cutting measures and relying on innovation and technology that can increase efficiency and reduce the cost of production.

Taking these long term goals of both OPEC and non-OPEC producers into consideration, it is time now to look at the big picture to get a clearer idea of where oil prices will be in 2016.

OPEC is currently trying to make the return of high oil prices dependent on the cooperation of non-OPEC members to cut production and this was made clear during its last meeting. That means OPEC will not cut oil production unless non-OPEC producers agreed to cooperate in cutting oil production as well. It is extremely important to highlight here that it is highly unlikely that oil prices will go up to levels above $80 per barrel again even if non-OPEC producers cooperated with OPEC to cut production. Why not?

The reason is very clear, it is about long term strategy. The return of high oil prices – to be precise, the return of oil prices that are slightly above high-cost oil producers’ break-even such as U.S. shale oil producers- means giving OPEC’s rivals the chance to come back and make money. And this poses a long term threat to conventional oil producers such as OPEC members. What OPEC is doing right now is keeping oil prices at levels where its members make money and their rivals do not – that is how they squeeze them out of the market and kill the shale revolution. What we can draw from this is that high oil prices pose a long term threat to OPEC.

While OPEC is determined to pursue its market-share strategy, U.S. shale oil producers are facing a harsh reality: die fast, or bleed to death. Amid the current low-oil-price environment, many U.S. shale oil producers are losing, but it seems that it’s better to hope that a miracle will happen and oil prices will go up than to go out of the market. U.S. shale oil producers are relying on factors that will drive oil prices up such as the economic growth triggered by low oil prices, increased demand, and decreased supply due to the decline in upstream investment. But in the current circumstances this will take time, as economic growth is slow, demand is lagging, and the oil market continues to be oversupplied.

Regardless of how complex the situation is and the fact that oil prices are unpredictable, the bottom-lines are clear. The return of high oil prices to levels above the break-even of U.S. shale oil producers poses a long term threat to OPEC because it means allowing shale oil to be economical and consequently creating competition for OPEC. On the other hand, oil prices heading below $30/bbl is unlikely to happen due to the fact that OPEC will be losing much. Therefore keeping oil prices at levels between $35/bbl to $75/bbl is a key priority for OPEC to protect its market-share.

How 2016 Supply and Demand Outlook Will Look Like?

The supply and demand equation is a fundamental factor controlling oil prices. Therefore, how oil prices will change in 2016 depends mainly on how the supply and demand outlook for 2016 will look. The problem here is that predicting oil prices based on the supply and demand outlook is very complex, and its complexity comes from the fact that there are a few vital variables that have a huge influence on supply and demand outlook. Those variables are, but are not limited to, geopolitical flash-points, OPEC’s next move, and economic growth- these variables are unpredictable most of the time. Therefore -besides the facts and figures of the current supply and demand- taking into account these variables is essential in predicting how the supply and demand outlook will look in 2016.

Regardless of how gloomy the oil market looks like right now, there are a few important signs that tell us a lot about how the supply and demand outlook may look in 2016. On the supply side, the global oil markets remain oversupplied, and OPEC will not be the one to rescue the market. In fact, OPEC’s current actual production level is somewhere around 31.8 mb/d, which is more than the official target of 30 mb/d. Besides that, a few of OPEC members such as Iran, Iraq, UAE and Libya are aggressively working on increasing their oil output. For instance, Iran is planning to increase its oil production by 500,000 to 1 mb/d over the coming year or so. And it is clear now that OPEC is officially allowing its members to increase oil outputs above the 30 mb/d official target.

Similarly, non-OPEC countries like Russia are working on increasing their oil output as well to cover their losses due to the current low-oil-price environment that makes the situation even worse. On the other hand, it is important to note that regardless of the continuous drop in the U.S. rig count, which used to be a sign of decrease in oil production, the U.S. production is not decreasing as it was expected to. This is due to the advanced technology used to boost production and offset or delay the effects of decreasing rig counts. On the demand side, the current oil demand and forecasted demand growth do not signal any positive sign of price recovery. According to the International Energy Agency’s Oil Market Report, global demand growth is forecast to slow to 1.2 mb/d in 2016 after surging to a five-year high of 1.8 mb/d in 2015.

Therefore, as many OPEC and non-OPEC countries work aggressively to increase their oil output to weather the effects of low oil prices on their oil revenues, and the fact that oil demand is lagging behind, the supply and demand outlook for 2016 tells us that the low-oil-price environment is here to stay. The oil industry in 2016 will continue to experience a slowing global crude oil consumption and definitely an oversupplied market. The only way it could be changed is if there is any collaboration between OPEC and non-OPEC on production cuts or in the event of any geopolitical flash-points which we do not hope for. Nevertheless, that may seem unlikely to happen as the competition for market share is very fierce and involving many producers even within the OPEC itself.

The oil and gas industry in 2016 will continue to experience the negative effects of the current low oil prices but with less intensity as it adapts to a low-oil-price environment. It will continue to consolidate and we will see many mergers and accusations taking place. Global exploration and production (E&P) activities will experience a slowdown as E&P spending that has so far declined by 20 percent will also fall by 11 percent in 2016, according to Evercore ISI’s “Global 2016 E&P Spending Outlook: An Industry Mired in Recession.”

Crude oil global stockpile levels will continue to increase and a phase out of fossil fuel subsidies in many parts of the world will also continue to emerge as many countries take advantage of the current low oil prices. Demand will increase slowly but that will be counterbalanced by the overabundance of oil supply and the huge stockpile. And lastly, oil prices will remain in levels between $35 to $60 per barrel unless a sudden geopolitical event takes place, or an oil production cuts agreement is reached between OPEC and non-OPEC.

You may also want to read:

How O&G Professionals, Companies & Countries Can Take Advantage of The Downturn

Expecting The Return Of High Oil Prices? Think Again…Here Is Why