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OPEC hopes producers will think twice on expensive projects

Published: 14:04 05 Feb 2016 GMT

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The bitter consequences of a year of low oil prices are being felt around the globe.

Full year results from the key players in the industry show an unprecedented “brutal’ downcycle that has wiped away billions of dollars worth of investment and added to the growing unemployment problem in the energy sector.

In early trading on Friday, Brent crude was priced above US$35 with WTI more than US$33 a barrel.

As expected, the international oil companies all shared the pain this week.

BP’s full year earnings were down 91 percent, Shell saw an 87 percent drop in earnings with profit down 53 percent, and ExxonMobil and Chevron saw full year earnings cut in half.

For Shell, this was the company’s lowest annual income in more than 13 years and like other major players, the company’s CEO Ben van Beurden said the company “will take further impactful decisions to manage through the oil price downturn, should conditions warrant that."

The oil services company Weatherford announced an additional 6,000 layoffs and the CEO, Bernard Duroc-Danner said “the brutality and length of this downcycle has challenged the entire industry, both our customer base as well as our peers.”

The company has already closed six manufacturing centres and plans to shut 9 more in the first part of 2016.

Coping with the lower oil price environment saw the company’s profits down 46 percent and the expectations for the year ahead are cautious.

“We believe the second half of the year will show a slight recovery underpinned by the stabilizing of commodity prices.”

That “slight recovery” might not be strong enough to dismiss the sometimes irritating familiar mantra of the oil industry. Investment banks are scratching their heads as they attempt to revise price projections.

The “lower for longer” line will remain throughout this year and possibly next, according to Morgan Stanley as it lowered its average 2016 Brent price forecast to US$30 per barrel.

That’s down from the more hopeful US$49 projection it estimated last year. The bank says it’ll be 2018 before we see the oil price back at US$70 a barrel.

Despite the headlines in recent months of Iranian oil adding to the global glut, few barrels have materialized and many analysts have now come to the conclusion that the country needs a lot more investment before the oil freely flows onto the global market.

The country’s President Hassan Rouhani completed a few European deals this week that will assist in that process. 

Italy’s Saipem will work on refinery and gas projects said to be worth billions of dollars and the French oil company Total will also support Iran’s export of oil to European refineries.

The global oil surplus in 2015 was around 1.6 million barrels a day.

That might not appear to be a lot given the fall-out and the non-OPEC players and smaller oil producers are wondering why OPEC will simply not take action and cut a couple of million barrels.

Many players in the market continue to hope for an emergency OPEC meeting before the scheduled June gathering.

Ministers from Saudi Arabia, Qatar, Kuwait and the UAE are more supportive of market forces and see signs of oil demand growth this year.

Crude inventories remain high in the US with more than 7 million barrels being added last week.

The standoff by OPEC has seen American barrels taken off the market and after a year of fiscal hardship and lower profits, OPEC is hoping that the key players will think twice about investing in expensive oil production for years to come.

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