The battle for short-term growth in oil, gas industry

Oil prices seem to have stabilized around the $60 per barrel but the signs that the prices will head downwards rather than upwards are there. Brent crude for April settlement added 77 cents to $60.82/bbl on the London-based ICE Futures Europe exchange, an increase of 35 percent from a near six-year low of $45.19/bbl on January 13.

Investment in oil production might fall by $100 billion this year, putting upward pressure on prices in the second half of the year. The US will pump 200,000 bpd crude this year than previously estimated as companies cut back according to IEA report.

Chinese energy demand growth is slowing and will continue to do so in the coming years. Iraq faces a “structural issue” in dealing with Islamic State militants who control parts of the country and that won’t be resolved in the short term, he said.

The latest Energy Information Administration (EIA) data shows that US oil inventories jumped by another 7.7 million barrels, with total inventories now having reached 425.6 million barrels. That is the highest level of oil sitting in storage in over 80 years, and more than 20 percent higher than the five-year average.

The latest data reveals two things; oil production has not leveled off yet, despite several months of prices sitting below the breakeven mark for many producers. Secondly, the data indicates that US producers may soon start to top off storage tanks. If production does not decline and oil storage capacity begins to run out, the glut of oil on the market could worsen pretty quickly, sending prices down once again.

Oil tumbles on revived oversupply worries

World oil prices fell sharply as the market appeared to do a double-take on the US oil inventories report showing US crude stockpiles hit a fresh record. The US benchmark, West Texas Intermediate for April, dived $2.82 to close at $48.17 a barrel on the New York Mercantile Exchange. European benchmark Brent North Sea crude for April delivery sank $1.58 to $60.05 a barrel in London.

Prices also retraced losses as investors covered more short positions in US crude futures a day ahead of the expiry of the front-month contract.

Oil has rallied over the past month, with Brent gaining 35 percent from a mid-January low as traders covered short positions after a 60 percent crash since June.

More threats now than ever before

Energy CEOs said their companies face more threats to growth than they did three years ago given the decline in global oil prices and oversupply of oil versus demand according to a global survey by PricewaterhouseCoopers International Limited’s (PwC). Rising tax burdens, over-regulation and geopolitical uncertainty top the list of concerns of the CEOs surveyed in the 18th annual Global CEO Survey.

Eighty-three percent of energy CEOs surveyed expressed concern over a rising tax burden, more than across the sample overall. PwC found that CEOs across industry sectors not only are worried about economic fundamentals, such as modest global growth prospects this year and determining where to place bets on future growth prospects in a rapidly changing environment, but overregulation. PwC reported that 78 percent of CEOs cited overregulation as a concern.

A number of oil and gas companies have slashed their 2015 capital spending plans. Some industry CEOs already see clouds on the horizon, with 26 percent expecting the global economy to decline over the next 12 months, up from 10 percent last year. However, another 35 percent of oil and gas CEOs expect an improved outlook.

“When it comes to their own prospects, 29 percent of oil and gas CEOs are very confident of revenue growth over the next 12 months, down from 39 percent last year,” PwC noted.

More CEOs are optimistic for the economic outlook three years from now, with 43 percent “very confident of growth”.

PwC also found that around 50 percent of oil and gas CEOs expect to enter into a new strategic alliance or joint venture over the next 12 months. As global demand weakens, many oil and gas companies are relying on alliances and ventures to create cost-efficient ways of operating, access new customers, markets and technologies, and to share risk.

“Energy CEOs cannot control market factors such as the world’s economic health or global oil supply, but can change how they respond to market conditions, such as getting the most out of technology investments, more effective use of partnerships and diversity strategies,” PwC said.

IEA, Saudi say oil market to re-balance soon

International Energy Agency (IEA) and Saudi Arabia say the oil market will rebalance in the next several months as a price collapse boosts consumption and curbs supplies. Investment cuts in the US, Russia and Brazil will curtail output growth, bringing supply and demand back in line.

“As a result of lower prices, there will be downward pressure on production,” Birol said, adding that the market will rebalance in the coming months or quarters. “As a result of lower prices, there will upward pressure on demand”, said Fatih Birol, the chief economist, IEA.

Oil slumped by almost half in 2014 as the Organization of Petroleum Exporting Countries (OPEC) maintained output amid the fastest US production in three decades, perpetuating a surplus. Prices rebounded this month as oil producers idled rigs and cut investment.

Demand is growing and the market has turned “calm,” Ali Al-Naimi, Saudi Arabia’s Oil Minister said. In a recent speech Saudi Arabia’s oil minister Ali al-Naimi said that the recent rise in oil prices to $60 per barrel is evidence that demand is rising. There are some data points to back up his claim. Oil demand increased by 2.2 million barrels per day in December 2014 from the same month a year earlier. That is the fastest rate of demand growth in over a year and a half.  The Saudis have said since last November that they would allow the markets to find equilibrium, and that may indeed be beginning to happen.

Oil exporters showing signs of strain

Most oil exporters are showing some strain mostly as a result of the low oil prices and the need to finance government budgets which are dependent on hydrocarbon revenue.

Nigeria’s situation is worsening by the political uncertainty from postponed elections, currency crisis and the insurgency in the North East part of the country. However, its oil output increased by 44,000 barrels per day in January over the previous month’s output.

The Russian Arctic is also seeing a pullback in activity. Although not entirely, or even primarily, the collapse of oil prices, Russian state-owned firm Rosneft has announced plans to postpone exploration of 12 Arctic licenses. Rosneft had ambitious plans to tap Arctic oil with the help of several international oil majors, but western sanctions have forbidden the involvement of those firms. When adding in the deteriorating currency and depressed oil prices, Russia may produce 560,000 barrels less per day in 2020 than it otherwise would have, according to the International Energy Agency. That is a 5 percent reduction from what the agency previously forecasted. The IEA argues that Russia is likely to be the “top loser” from the oil bust.

Norway released figures that show that the country’s exports have fallen by more than 18 percent year-on-year for the month of January. The shrinking volume of exports compounds the financial blow to the country; revenues have collapsed by half over that time period because of the combined effect of falling exports and falling prices.

For Brazil, Moody’s Investors Service slashed the credit rating for Petrobras, the state-owned oil company, dropping it to “junk” status. The corruption probe that has widened in recent months is taking its toll. Already the world’s most indebted oil company, Petrobras’ fortunes have taken a turn for the worse over the last six months. The company’s market capitalization has fallen from $310 in 2009 down to just $45 billion.

FRANK UZUEGBUNAM