February 06, 2017
We’re starting this first report of 2017 with a look back on some of our predictions last year. Back in January (2016), the oil price was still around the $30 per barrel mark and we wrote at the time that “such rock-bottom prices are not sustainable” and that “something has to give”. We said that “these low oil prices will not last and a level around the $40-$50 mark, seems likely by the end of this year”. As you will know, that’s pretty much what happened, with the price of oil recovering back up to the high $40’s by the middle of the year. We have recently reported that during OPEC’s November meeting, a decision was made to cut prices production, leading to prices jumping up to another level and finishing the year just above $55 per barrel.
Looking ahead to 2017, the situation is less clear. At the beginning of 2016, it was fairly obvious that the massive drop in prices had been overdone and would almost certainly be short-lived. But whilst the likely direction of prices in 2017 isn’t as obvious as 2016, unfortunately, we still predict another year of price rises. Nothing too dramatic and perhaps nothing at great speed, so our guestimate for December 2017 is that prices will be close to $65 per barrel.
Increasing oil prices will see the return of shale oilers to the market and another supply glut (and price crash) will be created. The indicators on the ground do back this theory up, with the shalers wanting to get back onto the scene when prices are attractive enough. But however keen the shalers are to get pumping again, there is no getting away from the fact that many of the operators from 2014 have gone bust, many of their wells lay in disrepair and much of the available skilled labour has drifted away into other industries.
So when the shalers do come back into the game, they will be facing a different and more difficult operating environment. Firstly they will have to lure skilled workers back into the sector by paying higher wages, then they will have to negotiate hard with the still smarting oil service firms, who will be trying to recoup as much lost revenue from the last 2 years as possible. And with less widespread drilling activity in the early days, the economies of scale around rig rental costs, drilling mud and packing sand will not exist. All of which may encourage the shale oil operators to tread cautiously over the next few months, meaning production levels are unlikely until the back end of the year.
Taking all of the above into consideration, we must also remember what has happened in the conventional oil industry (non-shale) since 2014. Global capital expenditure has now been declining for almost three consecutive years – something that is virtually unprecedented in the modern oil industry – and this has taken place in a sector where global oil production was already depleting at an annual rate of 4m barrels per day. This drying up of conventional oil investment has clearly compounded the sickly state of non-shale exploration and acceleration in the depletion rate to the 5m bpd mark is now predicted.
Put all of this together and you have the supporting framework for our conclusion that the next 6-12 months will bring increases in the price of oil.
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