WHAT 2016 HOLDS FOR THE OIL & GAS INDUSTRY
Trying to predict the future trends of oil prices is hard and the results are disappointing most of the time, especially when we ignore the facts and figures and rely on hope and wishful thinking. A year ago following OPEC’s decision not to cut oil production and keep the oil market oversupplied, many of oil industry experts, analysts and CEOs were expecting oil prices to recover in a short time. Hence, the oil and gas industry’s reaction to the current downturn was not as fast as it should have been and the consequences in many cases were catastrophic.
A few days remain to officially close the door on 2015. As the eagerly awaited December 2015 OPEC meeting is over, and as the outcome tells us that the cartel is not going to cut back its current actual output level unless non-members cooperate in doing so, many questions have arisen concerning the oil and gas industry and whether 2016 will be another 2015 or a better year. Where will oil prices be in 2016? How will the 2016 supply and demand outlook look, and could it change the course of events? In general, what will 2016 hold for the oil and gas industry? Such questions are what many oil and gas companies, investors and professionals want answers to.
Where Will Oil Prices Be In 2016? OPEC is currently trying to make the return of high oil prices dependent on the cooperation of non-OPEC members to cut production and this was made clear during its last meeting. That means OPEC will not cut oil production unless non-OPEC producers agreed to cooperate in cutting oil production as well. It is extremely important to highlight here that it is highly unlikely that oil prices will go up to levels above $80 per barrel again even if non-OPEC producers cooperated with OPEC to cut production. Why not?
The reason is very clear, it is about long term strategy. The return of high oil prices - to be precise, the return of oil prices that are slightly above high-cost oil producers’ break-even such as U.S. shale oil producers- means giving OPEC’s rivals the chance to come back and make money. And this poses a long term threat to conventional oil producers such as OPEC members. What OPEC is doing right now is keeping oil prices at levels where its members make money and their rivals do not - that is how they squeeze them out of the market and kill the shale revolution. What we can draw from this is that high oil prices pose a long term threat to OPEC.
Regardless of how complex the situation is and the fact that oil prices are unpredictable, the bottom-lines are clear. The return of high oil prices to levels above the break-even of U.S. shale oil producers poses a long term threat to OPEC because it means allowing shale oil to be economical and consequently creating competition for OPEC. On the other hand, oil prices heading below
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$30/bbl is unlikely to happen due to the fact that OPEC will be losing much. Therefore keeping oil prices at levels between $35/bbl to $75/bbl is a key priority for OPEC to protect its market-share.
How 2016 Supply and Demand Outlook Will Look Like? The supply and demand equation is a fundamental factor controlling oil prices. Therefore, how oil prices will change in 2016 depends mainly on how the supply and demand outlook for 2016 will look. The problem here is that predicting oil prices based on the supply and demand outlook is very complex, and its complexity comes from the fact that there are a few vital variables that have a huge influence on supply and demand outlook. Those variables are, but are not limited to, geopolitical flash-points, OPEC’s next move, and economic growth- these variables are unpredictable most of the time. Therefore -besides the facts and figures of the current supply and demand- taking into account these variables is essential in predicting how the supply and demand outlook will look in 2016.
Regardless of how gloomy the oil market looks like right now, there are a few important signs that tell us a lot about how the supply and demand outlook may look in 2016. On the supply side, the global oil markets remain oversupplied, and OPEC will not be the one to rescue the market. In fact, OPEC’s current actual production level is somewhere around 31.8 mb/d, which is more than the official target of 30 mb/d. Besides that, a few of OPEC members such as Iran, Iraq, UAE and Libya and aggressively working on increasing their oil output. For instance, Iran is planning to increase its production by 500,000 to 1 mb/d over the coming year or so. And it is clear now that OPEC is officially allowing its members to increase oil outputs above the 30 mb/d official target.
The oil and gas industry in 2016 will continue to experience the negative effects of the current low oil prices but with less intensity as it adapts to a low-oil-price environment. It will continue to consolidate and we will see many mergers and accusations taking place. Global exploration and production (E&P) activities will experience a slowdown as E&P spending that has so far declined by 20 percent will also fall by 11 percent in 2016, according to Evercore ISI’s ‘Global 2016 E&P Spending Outlook: An Industry Mired in Recession.’
Crude oil global stockpile levels will continue to increase and a phase out of fossil fuel subsidies in many parts of the world will also continue to emerge as many countries take advantage of the current low oil prices. Demand will increase slowly but that will be counterbalanced by the overabundance of oil supply and the huge stockpile. And lastly, oil prices will remain in levels between $35 to $60 per barrel unless a sudden geopolitical event takes place, or an oil production cuts agreement is reached between OPEC and non-OPEC.
Alahdal A. Hussein from Society of Petroleum Engineers (SPE)
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