Onset of a massive snowstorm on the U.S. East Coast sent U.S. heating oil up more than 10 percent
KUALA LUMPUR: There is still no clear sign of a sustainable recovery for the oil and gas (O&G) sector despite the recent uptick, almost two years since the price of crude oil began its downward spiral from a high of over US$100 per barrel in July 2014.
RAM Ratings’ head of consumer and industrial ratings Kevin Lim said on Tuesday by the time the sector claws its way out of this slump, it could become one of the longest downtrends for the O&G industry.
“Contrary to the recent uptrend in oil prices, the underlying oversupply remains significant and expected to persist at least until the first half of 2017 as inventory is still building up, testing global storage capacity to its limits. Coupled with the unsuccessful attempts by the major oil producers (in the recent meetings in Doha and Vienna) to reach a deal vis-à-vis a production freeze, this points to a protracted recovery in oil prices. The current scenario bears some resemblance to the prolonged price collapse in 1981-1986, not only in terms of duration but also the fundamentals that drive oil prices,” he added.
The main similarity between the oil price collapse of the 1980s and now is the reason - a new source of supply, RAM Ratings noted. Three decades ago, non-OPEC (Organisation of Petroleum Exporting Countries) output had exceeded OPEC production as supply from the North Sea (the UK and Norway), Russia, Mexico and China had come on-stream. At that time, OPEC had reverted to its production target of 30 million barrels per day (b/d) to protect its market share, abandoning its role as a “swing producer”.
Today, the rating agency said the rise of unconventional oils, particularly from American shale formations, has contributed significantly to a global increase in output. The gap between excess supply and consumption doubled from 0.9 million b/d in 2014 to 1.9 million b/d last year. Crude prices had started their dramatic descent in mid-2014, exacerbated by the OPEC’s decision not to limit output that November.
In contrast, the short-term V-shaped price dip in 2008-2009 had been a result of the crude surplus, which had been entirely due to lacklustre demand from a disintegrating global economy and had almost nothing to do with new supply, it noted. The surplus had only lasted six months then, as an OPEC production cut in early 2009 had limited the quantum and duration of the surplus.
All said, however, case histories can neither predict the present nor the future, but only provide a basis for comparison, it said, adding that its similarity with the scenarios in the 1980s and 1990s merely suggests that the current phenomenon was likely to be protracted.
RAM Ratings has assumed an average Brent crude price of US$40 per barrel for 2016 and US$45 per barrel for 2017. We expect crude prices to stay volatile in the coming months, pressured by a slew of uncertainties over supply growth as well as concerns about unsustainable consumption growth in major consumer markets. “The recent uptick in prices, substantially driven by unplanned supply outages in Canada, Nigeria, Iraq and Libya, is unlikely to last once productions normalise. The hope and expectation of a near-term supply freeze on crude oil could also be a destabilising factor,’’ the rating agency said.
The collapse in crude prices and the persistently weak outlook have led to substantial cutbacks in development expenditure in the past year. It is estimated that about US$400bil of projects within the global O&G sector has been deferred or cancelled, it noted..
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