Low prices, new supply weighing down global market
Jan. 24, 2016 at 12:04 a.m.
Updated Jan. 25, 2016 at midnight
HOUSTON - Power vacuums left by the U.S. in the Middle East and a resurgent Iran are partially to blame for the volatile oil market, said former vice president Dick Cheney at the 8th Argus Americas Crude Summit in Houston.
"The United States has ceased to be a significant presence in the region to counter threats," Cheney said, referring to President Barack Obama's so-called "pivot to Asia." "(Middle Eastern countries) knew who we were, they knew what we would do. that's no longer the case. Many of our allies now have severe doubts about our commitment."
The statement was a strong rebuke of Obama's diplomatic moves toward Iran, which have culminated in the lifting of sanctions and the release of Iranian oil onto the global market.
In a week when prices dipped below $28 a barrel before rising above $32, many at the conference expressed doubt that oil would find strong footing in 2016. Many analysts saw slowing demand from China and continuing high oil production from the U.S. and other oil exporters as depressing prices and threatening the solvency of oil companies.
Oil prices sat above $100 in June 2014 before falling to current levels.
For Helima Croft, chief commodities strategist and managing director at RBC Capital Markets, the Iranians' implementation of the nuclear agreement happened faster than expected.
"The barrels are actually hitting the market at a really bad spot in terms of demand," she said. "Seasonally it is not great with refinery maintenance in the Gulf, so the barrels are hitting at the worst time possible."
Croft estimated Iran may bring between 375,000 and 500,000 barrels onto the market without new investment.
She also was keeping tabs on Libya, whose production has been curtailed because of attacks from the so-called Islamic State on major oil facilities in that North African country in the last few weeks.
Continued oversupply and stored crude is something that will take time to draw down, said Andy Brogan, Ernst & Young's global oil and gas transactions leader.
Continued strength in the U.S. is a wildcard that Brogan and others did not believe would extend into 2015.
"I think what surprised everybody was the production was resilient, and the other high cost basins haven't taken stuff out because they're high cost to develop," he said.
While American oil production remains high, low oil prices are seriously threatening to torpedo many shale oil companies, said speaker Paul B. Sankey, managing director and senior oil and gas analyst for Wolfe Research. He said at least a third of shale companies may be threatened with bankruptcy.
How these companies will continue to fund their projects is a subject of much discussion as Wall Street attempts to cut its losses.
"I think the big questions for shale operators is what redetermination looks like," Croft said. "They were extended a lot of credit, and so the question is . the financing going to remain open to these companies to see them through this price environment, which remains to be seen."
Some believe that cuts should continue to come from the high cost producers, an opinion shared by Wael Al-Khuder, head of Kuwait Petroleum Corporation's office for the western hemisphere in Houston.
"The lowest producers shouldn't be the ones that are cutting back production. It should be the highest producers," he said. "Until the highest producers get to the consensus that the market is not going to rectify itself on its own, somebody needs to take an active decision, regardless of who this high producer is. Whether it's a high cost in the U.S. or in Canada ... otherwise we're still going to be suffering."
Al-Khuder said he does not believe Organization of Petroleum Exporting Countries, or OPEC, was in danger of fracturing, but he thought it would become less influential. He also does not believe Middle Eastern OPEC members are suffering as much as their foreign counterparts.
"Middle East countries are better off than some of the other OPEC countries such as Venezuela and Nigeria. They're really feeling the pain there," he said. "So eventually I'm going to see more reaction from Venezuela and Nigeria before we see any reaction in the Middle Eastern countries."
The fall of oil prices under $30 a barrel was something that was not factored into Per Magnus Nysveen's predictions.
The senior partner and head of analysis for Rystad Energy said below $30, new drilling would grind to minimum levels, but a return to $40 could stabilize shale markets somewhat.
With current instability affecting the market, including British Petroleum announcing a further 4,000 job cuts and Devon Energy announcing an unknown number of layoffs Friday, the new year is shaping up to be hard times for shale.
"I think the first half of 2016, you will still see companies are reducing staff and costs as much as they can," he said. "But then the good thing of going down is that it will go up again."