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December 2015

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Editorial comment

As one year draws to a close, it is only natural to be looking ahead to the next and wondering what it holds in store. The oil industry is no different in this regard and speculation as to the fate of the oil price continues unabated. The price estimates being shared and discussed across much of the media range from the worryingly pessimistic, right through to the overly optimistic.

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Much of the reasoning behind the more pessimistic reports comes from worries about Iran and the likely impact of this major exporter’s full return to the field, as it rushes to reclaim market share when sanctions expire next year. Daniel Yergin, Vice Chairman of IHS, commented on this fear that is causing sleepless nights across the upstream industry, “new petroleum supplies are likely to come into the market in 2016. Assuming the nuclear sanctions are lifted on Iran in late winter or spring, Iran could bring what we currently estimate to be another 400 000 to 600 000 bpd within several months. Iran’s oil minister pegs the number higher – around a million bpd.”1 Though Yergin doesn’t offer any specific examples of where the price might be, back in September Goldman Sachs suggested that prices as low as US$20 might be on the cards;2 not a pleasing prospect for anyone in the upstream industry. With predictions like this being shared, it is perhaps little surprise that a recent survey showed that of the analysts and investors interviewed, just 21% felt that the oil price had already bottomed out.3

For every gloomy prediction, however, there’s a more positive one. The U.S. Energy Information Administration has predicted in its ‘Short Term Energy Outlook’ that Brent crude will make a modest rise, supported by falling US production over 2016, and average US$54 – 56/bbl next year, with WTI on average US$4 lower.4 Whilst that’s not exactly the US$60 that many had been hoping for, it is at least a step in the right direction.More positive news comes from recent analysis conducted by the Bank of England, which bucks the general consensus and suggests that the oil price decline was actually a result of complex demand factors rather than issues with oversupply. The theory posits that issues with currency exchange rates, specifically China’s pegging of the yuan to an increasingly strong US dollar, led to decreased Chinese industrial efficiency and reduced demand for all commodities, not just oil.

To quote Steven Kopits, Managing Director of Princeton Energy Advisors, who commented on the report: “There was no weakness in global demand; rather, there was specific weakness in China’s industrial sector – the primary purchaser of global commodities – specifically due to China’s failure to devalue the yuan in line with the currencies of other US trading partners.”5 According to Kopits, if the Bank of England’s model is accurate, prices could rise by as much as US$35 as China adapts to the situation – a devaluation of the yuan might not even be necessary.6

Optimistic or pessimistic, there’s only so much that these predictions can achieve. I said last month that when it comes to predicting the oil price, “one might almost be better off reading tealeaves.” I still stand by that comment; the price of crude oil is impacted by a huge variety of factors and vested interests, many of which have no direct connection to the actual oil industry at all and are subject to change at the whim of equally unrelated external factors.

What the oil and gas industry can do in the meantime is invest in efficiency boosting technologies and processes, reducing production costs, and learning lessons from other industries. It is innovation, forward thinking and the willingness to push technology to its limits that has allowed the oil and gas industry to spread across the globe, unlocking harder-to-reach assets and doing what was previously thought impossible. It is this drive to innovate that will see the industry not just survive the downturn, but come out the other side, stronger and more efficient than before. See you in 2016!

References

  1. ‘The party is over for oil’, http://www.cnbc.com/2015/12/01/oil-prices-the-party-is-over-commentary.html
  2. ‘How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility’, http://www.bloomberg.com/news/articles/2015-09-11/-20-oil-possible-for-goldman-as-forecasts-cut-on-growing-glut
  3. ‘CNBC Survey: Oil Headed Lower’, http://video.cnbc.com/gallery/?video=3000461717
  4. ‘SHORT-TERM ENERGY OUTLOOK’, http://www.eia.gov/forecasts/steo/
  5. ‘Why oil could rally big in 2016’, http://www.cnbc.com/2015/11/13/why-oil-could-rally-big-in-2016-commentary.html
  6. Ibid.

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