So much for a happy new year! The first few weeks of 2016 have given no cause for cheer with crude falling a further 20%, more job losses, and further project delays or cancellations.
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Colin Welsh, CEO, Simmons & Co. |
It’s been a horrible start to 2016. A record number of short contracts are weighing on the price of crude oil. Plus, the price has broken below the US$30 threshold and $20 a barrel now looks like a very real prospect.
Obviously this is terrible news for the upstream industry and it is going to be an incredibly tough year for everyone involved in or dependent upon oil and gas production. I firmly believe that only the fittest companies will survive.
It is extremely difficult to be positive in the face of such a torrential flow of bad news, but it’s important to put things in perspective.
The declines in North American production are now accelerating and stockpiles there seem to have plateaued.
While Iranian sanctions have now been lifted, it will take some time to agree to contracts with oil companies and service providers in order to begin the work needed to rejuvenate production. So, fears of an overnight glut from there may be overblown.
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Source: US Energy Information Administration, Short-Term Energy Outlook, January 2016 |
Demand growth for crude oil in 2015 was 1.8 MMb/d, yet most forecasters are predicting a return to historic norms of just 1 MMb/d of growth in 2016. I struggle to see the logic for this given that low prices typically stimulate demand. Clearly, China is a big part of this. Again, many commentators refer to an impending reduction in the size of China’s economy when in fact it’s the rate of growth that is slowing and not the size of its overall economy.
My final point of solace is that despite the recent slump in crude prices the five-year average price is $94/bbl. Markets have a habit of reverting to their long-term averages and $60/bbl – let alone the current price – is simply not economic for any of the major producers, so you have to hope for and expect a recovery before too long.
Unfortunately, it’s impossible to predict when that will happen. As Warren Buffett said, “Some things just take time. You can’t make a baby in a month by getting nine girls pregnant!”
In the meantime the industry mustn’t panic and become locked in short-term thinking. Businesses and their investors need to keep calm, focus on survival and also look through the cycle. The system has suffered a shock but isn’t broken and there will be a lot of opportunities ahead for the survivors.
The important thing to remember is that the industry will survive this current period of difficulty to see many more days in the sun.
Colin Welsh joined Simmons & Co. in 1999 to establish the firm’s Eastern Hemisphere business. Prior to joining Simmons, in 1987, Welsh established the Aberdeen office of RMD, a newly formed accountancy and corporate finance firm. Previously, he worked in both the London and Aberdeen offices of Touche Ross. Welsh graduated from Aberdeen University having studied economics, accountancy and law. He went on to qualify as a Scottish Chartered Accountant while working at Ernst & Whinney (now Ernst & Young). So much for a happy new year! The first few weeks of 2016 have given no cause for cheer with crude falling a further 20%, more job losses, and further project delays or cancellations.
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