Tough Times in the Oil Market
Analysts Goldman Sachs made a recent statement to clients claiming that the rules that had governed the market for so long have rapidly undergone change. The firm wrote that the structure for the market of the New Oil Order is not one that has been experienced before and can be described as “unprecedented.”
They also noted that the original balance of power that had existed between the largest and smallest oil companies had also experienced a turnabout.
In years gone by, large oil companies such as Exxon Mobil and BP, in addition to state-owned companies, were in possession of low-cost oil production that was generally more efficient. On the other hand, smaller companies, as would be expected, faced far higher barriers to entry.
It was a foregone conclusion that the drilling of oil would involve huge investment with respect to oil platforms, pipeline pigging companies, oil transportation, and more. That would take either huge balance sheets or a lot of state backing or entry to the market would not be possible.
This state of play, however, has now changed due to lower-cost fracking technology.
As a result of this, fracking companies can produce oil relatively cheaply as well as shut down wells speedily as soon as they become unprofitable or unusable, thereby allowing oil supplies to continue to flow efficiently into the marketplace.
Credit Suisse analysts have also recently stated that Total and ConocoPhillips both expressed that production costs for U.S. shale will likely fall by as much as 30%, while 80% of the production of shale oil should attract a price of less than $60 per barrel by the time the current year is out.
On the other hand, the oil-futures market has projected that the price of oil will return to almost $70 per barrel.
The current price of West Texas Intermediate crude oil sits at just below $44 per barrel.
Credit Suisse also went on to say that in spite of a huge drop in the number of U.S. oil rigs, production is still relatively steady.
Irrespective of the current and future prices, countries and large oil companies that depend on the revenues that come from oil in order to finance their investment commitments, continue to pump oil at consistent levels since they must bring in the revenue.
And this is a large part of the reason why OPEC, the oil cartel made up of 12 members and led by the Saudi Arabians, are aiming to maintain their daily production targets regardless of the sharp downturn in the market.
Many analysts, Credit Suisse included, have argued that the Saudis, who are considered OPEC’s de facto leader, is focused on seeing a reduction in the price of oil so that it’s low enough to ensure there is no more investment in U.S. shale.
Credit Suisse wrote, “It is, of course, very hard to know what price Saudi Arabia is targeting, but its behaviour is suggesting to us that this point has not yet been reached.”
Credit Suisse also added that though Saudi Arabia is fully expected to run a 20% deficit for the remainder of the current year, the kingdom will likely continue with a “price war” over the coming months and perhaps well beyond.
Oil traders still expect the price of oil to rise, which may be something of an over-optimistic outlook given that OPEC’s policy has been to oversupply the market, thereby pushing out some of the more marginal producers and drive the prices of oil down.
Credit Suisse have also noted that oil price bear markets historically last anything between 11 and 28 years. Bull markets, on the other hand, typically will last less than 10 years.
If taking the longer view, it’s not exactly a rosy picture that’s being painted for the commodity.
The oil market’s structure has undoubtedly changed, given the routing right across the commodities’ structure, and it’s hard to pinpoint any particular aspect that is currently working in its favor.