Oil Price Update

Oil prices have collapsed, again. WTI and Brent crude oil prices are threatening their 5-year lows, yet again, and that means continued sweet + low prices at the pump for consumers. It also means heavy trouble for oil producers.

Companies like ExxonMobil and Chevron are seeing their profits take big hits and as a result are cutting thousands of jobs. Exxon, a giant with a market capitalization of over 300 billion dollars, posted second-quarter profits 52% lower than year-ago levels. In real numbers, Exxon made $4.2 billion versus a whopping $8.8 billion exactly one year ago.

Chevron isn’t doing so hot either. For the first time in 20 years Chevron actually saw a loss from its oil-and-gas pumping operations –to the tune of $2.2 billion.

The world’s big energy companies have had to postpone $200 billion worth of spending on new projects. The name of the game right now is cutting costs and many more people will lose their jobs yet. At least 46 big oil and gas projects targeted at 20bn barrels of oil reserves have been deferred. Companies like British Petroleum, Royal Dutch Shell, Statoil and Woodside Petroleum are all biding their time as oil prices slump for the second time in a year.

oil price

You can see the dilemma.

At $45/barrel, oil producers just can’t earn enough money to justify new drilling projects – especially ones aimed at releasing oil in the harder-to-reach areas. Companies are still making money but the need for public companies to show profits are leading to countless numbers of jobs lost. It’s estimated that there have been nearly 70,000 job losses worldwide.

Oil Prices: Back to Beginnings

The slide in oil prices started a year ago, in July, and then accelerated as OPEC (the Organization of Petroleum Exporting Countries) decided NOT to cut output in response to a U.S. supply overload. This, at a time when the U.S. was producing more oil than ever and, according to the U.S. Energy Department, had become a net oil exporter (sold more oil to other countries than it bought from foreign entities) for the first time since 1949. U.S. oil refiners, those who process and refine crude oil into more useful products such as gasoline or heating oil, exported record amounts of gas, oil and diesel around the world.

The fact that OPEC, led by Saudi Arabia, decided to continue producing oil at previous levels meant the market was flooded with petroleum, aka black gold. The market is assuming that the Arabian kingdom is attempting to squeeze out American producers, choking off prices so that oil producers find it harder and harder to maintain profitability. Other theories suppose that Saudi Arabia is trying to put the squeeze on Russia, in the larger context of the Syrian conflict. Russia supports Assad while the Saudis do not and Russia is hugely reliant on high oil prices to prop up the economy. The Russian petrostate might concede on pulling support on Assad is the Saudis were to let oil prices rise.

But pragmatism, rather than ruthlessness, might actually be what is going on.

Saudi Arabia is often called the “central banker of oil’. A key player, they are adept at using oil politically. Normally when oil prices slide, Saudi Arabia will step in and cut back on production allowing prices to rebound.

oil price

This time though, things are different. Everyone is producing oil, and with Iran is ready to come back online, it’s conceivable that there will be a surplus of oil for a long time. After all, the Iranians will want all the revenue they can get from oil.

The last time there was a surplus of oil globally the Saudis got burnt. Back in the 1980s, they cut production, which propped up the price, but they lost massive market share as other players were able to keep production fairly level. As the surplus ran down, other countries were able to grab the contracts that the Saudis had gotten rid of or cancelled in an effort to raise oil prices.

So this time, they know better. The oil monarchs have plenty of money in reserve ($500 billion) and are willing to ride out low oil prices.

U.S. is Hurting

The Saudi strategy seems to be working.

The Baker Hughes Rig Counts are an important business indicator for the drilling industry. When rigs are active they are able to produce oil for the rest of the oil service industry chain.

The last count of active U.S. rigs was 874. A year ago there were 1889 active rigs in the U.S.

Compare that with 215 and 392 for Canada and 1146 currently active international rigs and 1344 active rigs last year and you can see that the U.S. has been hit the hardest.

oil price

Clearly, nearly every oil producing U.S. state is suffering. Texas has lost over 500 rigs, a change of -60%. Only Alaska has seen more rigs active than year-ago levels.

The outlook is for lower prices for longer. Goldman Sachs believes that the price will be stuck around $50 until 2020. The World Bank thinks prices might rise to $80/barrel – which is certainly optimistic but still lower than peak oil prices.

So it seems that the world is heading towards 2016 with a surplus of oil to continue, averaging around 1.5 million barrels a day on top of demand levels.

The rig count doesn’t tell the whole story, of course, as technological advances can help oil producers to more easily extract hard-to-reach oil deposits.

In the meantime, the global oil surplus continues. Throw in the new numbers for Chinese manufacturing, which fell to a two-year low, and the demand for oil looks to take a pretty big hit.

 

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