A new year has begun, but some old problems remain. When it first became clear that the current downturn wasn’t going to disappear overnight, there were optimistic predictions that by 2016 everything would settle down, that prices would return to around US$60 and the crisis would (largely) be over. However, as time moved on and 2015 drew to a close, forecasts began to show that 2016 was unlikely to bring about a rise in oil prices, but rather would see the oil price fall to lows that it had not encountered for more than a decade.
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That second, rather bleaker, prediction has come true with Brent crude prices falling to US$30/bbl and WTI dipping into even lower territory. As always, there is more than one factor at play when trying to understand the oil price, in particular why 2016 has started off so poorly. On the demand-side, continuing economic slowdown in China and a warmer than expected winter took their toll, and on the supply-side OPEC’s refusal to cut production combined with ongoing concerns over Iran’s imminent re-entry to the market have also weighed heavily on prices.
Whereas last year most predictions seemed to be focusing on where oil was going to climb to after a recovery, this year analysts are scrambling to calculate how far it has yet to fall. Analysts at Standard Chartered have predicted that oil could even fall as low as US$10/bbl this year1 as the impact of geopolitical tensions are softened by oversupply. However, US$10/bbl isn’t a view shared by all. Dan Yergin, Vice Chairman of IHS has argued that the industry would need to completely run out of storage space in order to hit such a low, and (at least according to IHS’s data) that doesn’t look likely.2 Yergin also predicted that demand for oil, spurred on by lower prices, would continue to grow, and outperform 2014’s levels if not those of 2015.3 Indeed, Chinese imports jumped 9.3% in December as the country took advantage of the low prices and chose to restock its strategic reserves, bringing the total imports for that month to 33.19 million t.4 Even so, any kind of significant recovery looks a while off.
The oil industry isn’t out of the woods yet. A year of further challenges will force the industry to continue adapting to the new financial climate – innovation, investment in new technologies that squeeze out every last cent of value, and painful decisions, such as wage cuts and redundancies are all likely essential. 2016 will likely also see an increase in M&A activity as those companies with more positive balance sheets take advantage of lower prices; the Schlumberger-Cameron merger and the ongoing Halliburton-Baker Hughes deal could signal the beginning of a series of such acquisitions. By this time next year, the face of the global oil industry could be very different.
There are changes here at Oilfield Technology too. In order to continue providing the best possible technical content for the upstream industry, we’ve introduced some exciting new features including technical Q&As (this month’s edition is on Drill Bits, p. 21) and ‘Oilfield Technology Extreme’, which provides a special focus on technologies designed to handle the harshest conditions (p. 51). For more information on these features, or if you want to take part, feel free to get in touch!
- ‘Oil could crash to $10 a barrel, warn investment bank bears’ - http://www.telegraph.co.uk/finance/oilprices/12094394/Oil-price-could-fall-to-10-a-barrel-warn-investment-bank-bears.html#disqus_thread
- ‘Oil prices hit by Iran supply, China slowdown but $10 a barrel unlikely, says IHS’s Yergin’ - http://www.cnbc.com/2016/01/12/oil-prices-hit-by-iran-supply-china-slowdown-but-10-a-barrel-unlikely-says-ihss-yergin.html
- 'China’s oil imports jump 9.3% in December’ - http://www.marketwatch.com/story/chinas-oil-imports-jump-93-in-december-2016-01-13