Spring 2016 Newsletter - Offshore Market

Spring 2016 Newsletter.pdf

Spring 2016 Full Article.pdf

Every day we hear news of more cuts in E&P budgets, leading to more charter terminations for rigs and offshore service vessels. Oil & Gas com-panies, both private and government controlled, slashed projects around the world during 2015 and 2016 with everyone running for cover as oil prices slid from over $100/BBL to less than $30/BBL. We hear from clients daily how this is the worst market downturn in their lifetimes, and from the number of rigs and boats tied up, it definitely is.

But just to put things in perspective, unlike the last oil price drop in the 2008/2009 Great Recession, when prices even fell by an even wider mar-gin (from about $145/BBL to $32/BBL), the current downturn has not been caused by a decline in consumption. From 2007 to 2009, worldwide consumption fell by close to 1.5 million barrels per day (mbpd). From 2014 to 2016, worldwide consumption has actually increased by about 1.5 mbpd. So what has caused the price to plummet and oil companies to act like the sky is falling? The U.S. Energy Information Administration (EIA) estimates current worldwide production at 96.5 mbpd and consumption at 94.5 mbpd. That’s about a 2 mbpd surplus. A little over 2% of a supply imbalance has caused a 70% price crash along with the greatest reduction in offshore activity since the 1980s. While the EIA does see a 1% drop or less in consumption over the next year or so (primarily due to the slow-down in China), they still see production and consumption reaching equilibrium by mid-2017 and consumption increasing beyond.

No one has a crystal ball, but it seems that the energy trading markets have overreacted to the size of the surplus. Major producers may have had political goals or other nefarious motivations, it’s hard to say. There is obviously no master plan or leadership from OPEC. OPEC (or Saudi Arabia) could likely have prevented this price decline simply by saying they would cut production by less than 5% (even if they did not actually cut). Instead it’s been every company or country for themselves recoiling to protect their cash flows and make it through the downturn. The industry has to some degree been the victim of its own success, with innovations in drilling, recovery and production. The strengthening of the US Dollar has also had an impact on the price of oil, along with many other factors. But the fact remains that consumption has not dropped, and is expected to rise, especially at the current reduced prices. At some point, when the market swings the other way, with consumption in equilibrium with produc-tion and the only spare production capacity within OPEC, the historic cut backs of the last few years will become very evident. How long will it take the industry to ramp up after such a deep pull back? Rigs, vessels, personnel, all the infrastructure that goes into exploration and production will all have to come back. It will take years for the industry worldwide to come back up to full speed, and in the meantime, oil prices could take a steep jump. We have seen what a 2% surplus can do to prices. Even a hint of a shortage could move markets in an unprecedented upswing.