$70 oil is probably not here to stay; but it’s still good news for the long-suffering Oil & Gas industry.
For operating companies, oilfield manufacturing & service businesses and the vast array of professional firms supporting the global oil & gas industry, things seem to have been looking up. Today, Brent crude hit $71 per barrel for the first time since 2014 – driven by the continued reduction of US crude inventories. This on top of aggressive supply reductions which are expected to be sustained for the rest of the year – collaboratively sanctioned by OPEC and Russia. Compounding supply reductions, the weakening dollar incentivises investors to move away from currency and into commodities including oil.
A turbulent game of tug-of-war; the balance between supply (including inventories) & demand for oil always seems on a precipice. Supply disruptions of any kind, particularly from important-yet-volatile producers such as Libya (or right now, Iran through US sanctions and Venezuela due to its domestic economic issues), impact significantly on the value of oil in the global market.
And over the last few years, the growing output from US shale is pushing the country’s production towards a record 10.3 million barrels per day this year – and could even exceed 11 million barrels the following year to become the world’s leading producer above Saudi Arabia and Russia.
The country’s production growth is possible due to a relatively low break-even rate on production, with most producers able to drill and produce in profit at $45-50 per barrel (although recent cold spells have caused unexpected reduction in US production at close to 300,000 barrels per day).
But all things being equal, this American behemoth poses downward pressure on Brent prices, and many analysts cannot support a sustained price in excess of $70 for long. However, riding high on optimism are the majority of oil executives – and expectations are of capital expenditure increases in 2018, increased hiring in the sector and a boost to R&D investment.
Extreme belt-tightening measures were enforced by the major E&P and oilfield services businesses as the industry collapsed down to the recent era of $30 oil. If cost reduction efforts can be sustained throughout the next few years and service & equipment inflation can be maintained – then a lower expectation on oil price below the current level of $70 can still result in profitable exploration efforts.
The potential for supply disruption from Iran & Venezuela on one side, increasing consumer demand (albeit due to a low oil price scenario) on the other, and the question around how stringently OPEC & Russia will stick to their production cuts in light of rising oil prices…it’s anyone’s guess how 2018 will pan out.