Oil producers are still hurting

2015-09-25 15:31:00
Few analysts are issuing optimistic reports, except to offer long-term consolation.
“Lower for longer,” is what we’re hearing

Lower prices may be helping industry and slowly boosting global demand but oil producers are still hurting and the forecast remains gloomy.

In early trading on Friday, Brent crude was priced around US$48 with WTI above US$45 a barrel.

“Lower for longer,” is what we’re hearing. It appears to be the mantra of the moment resounding across the markets.

This was not what the industry had banked on and certainly not what OPEC members wanted to happen.

Few analysts are issuing optimistic reports, except to offer long-term consolation. 

But the future is too far away for many oil producers and survival of the fittest without too much collateral damage will now be the target. Few analysts will dare utter a figure above the US$65 price range for the next two years.

The Wall Street Journal undertook a recent survey of 13 major investment banks and the average of US$58.70 a barrel for Brent crude seemed to be the consensus, with WTI hovering just above US$54 a barrel.

The good news will come with an increase in price next year.

Only three banks saw oil above US$70 by the end of 2016, the general consensus was below US$65 a barrel. Goldman Sachs is still holding on to its gloomy worst-case prediction of the potential for oil to fall as low as US$20 a barrel.

Analysts at Standard and Poor cut their oil price assumptions this week saying, “the decline in oil price assumptions represents the prospects of a more prolonged recovery,” and noted that while American exploration and production companies have tightened their budgets, there has not been a significant decline in oil production.

The price for Brent was cut to US$50 a barrel with 2015 projections at US$45 a barrel.  Both the benchmarks should improve by US$5 in 2016, according to S & P. 

The slow rate of global recovery will continue to hamper the market and HSBC cautioned about the slowdown in emerging markets as well as in China.

The American economy was the bright spot this week with stronger economic figures released from the Commerce Department about the country’s performance in the second quarter.

The percentage annualized rate rise was 3.9 percent compared to an earlier estimate of 3.7 percent. Cheaper fuel has contributed to the growth in consumer demand, helping to sustain jobs and income growth.

The economy is experiencing stronger consumer spending and a growth in business investment. These are all positive signs to support the Federal Reserve’s intention to raise interest rates later this year.

There was not enough positive news on the oil market this week to keep Brent crude trading above US$49 on Tuesday as the fundamentals remain the same.

Supply is abundant, demand is weak, Saudi Arabia keeps pumping oil and Iran could make a comeback.

The market is crying out for a different story, but little is changing on a week-by-week basis. Wood Mackenzie issued a report this week saying investment will likely be further hit, as projects above US$1.5 trillion remain uneconomic at this oil price.

The Iranian oil sector is gearing up for a return to the global market place and as much as 500,000 barrels a day could be added to its export figures by December.

The chief of investment for the national Iranian Oil Company, Ali Kardor said he expects to rise by an additional million barrels mid-2016. Iran’s main customers are China, India and South Korea who have expressed interest in increasing oil imports. Iran is currently producing around 3 million barrels a day.

While the American shale boom boosted domestic production in recent years, many high-cost producers are now feeling the pinch. April figures from the US Energy Information Administration said American production peaked at around 9.6 million barrels a day.

Current production is around 9.2 million barrel a day. Latest July figures from the International Energy Forum’s led Joint Organisations Data Initiative say that Saudi Arabia produced 10.4 million barrels a day. That’s its second highest production volume in more than a decade.

As we brace for the “lower for longer” scenario, the good news is the consensus opinion that we’re range bound for now and the price should fall no lower.

On the horizon we need to watch for the rise of Iran and any downturn in global demand.