Industry Overview – October 2017

The Back Story

  • On Feb 16, 2016 Saudi Arabia, Russia, Qatar and Venezuela signed a cap on production, at near record high production levels, in a bid to bring oil supply back in line with demand and raise prices that hit 12-year lows last year, while still maintaining market share, a lofty plan that hasn’t worked.
  • Saudi Arabia is fighting an “sinkhole” war in Yemen requiring increasing amounts of expensive western armaments, coupled with their unofficial proxy war in Syria, these are expenses Saudi can ill afford in a $40-50 / BBL environment. Additionally, the crown prince has embarked on extensive investments in civil and environmental infrastructure. The unsustainability of Saudi’s spending has clearly been demonstrated in Saudi’s recent offerings of state owned ARAMCO, bond floats and cutbacks in social programs.
  • The stress in other OPEC countries is worse, from civil unrest and widespread protesting in Venezuela to the Niger Delta Avengers in Nigeria.
  • First quarter 2017 global oil inventory started to show draws in response to initial decreases in production, additionally in US shale, China & Western Canada, however throughout 2017 there has been matched increases in production relative to draws.
  • The exacerbated decline in global oil prices has added an element of conservatism in virtually all oil and gas related equipment valuations.

Looking Forward

Where are, equipment values likely to go in the future? Given the uncertainty with the world markets today including the economies of many nations, political uncertainty, terrorism and the continuing turmoil in the middle east, that is tough question to answer with any degree of certainty. There are several factors today that suggest that the market and conversely equipment values should soon start an incremental recovery from the current state of depressed value.

  • Most oil producing primaries are fully aware of the notion that a production freeze is needed to move forward in a sustainable way, however due to economic pressure and desire to maintain, or in the US case expand market share, continue to produce.
  • OPEC’s output in September was just under 33-MM BBL/day, up from the previous month and in-excess of its production cap, indicating a lack of compliance from their members. Unless OPEC adheres to its production cuts, rebalancing will suffer a major set back.
  • Global demand is out-pacing expectations, increasing at approximately 1.75-MM BBL/day/Yr. New oil discoveries are at a 70-yr low, eventually oil prices will ratchet upwards.
  • It is most likely that we experience an sustained altitude of approximately $50 +/- $5 / BBL WTI throughout the last quarter of 2017, with increasing equipment utilization up by approximately 15% over the same period last year and paralleled remarketing potential.

If current trends uphold, it is likely that oil prices will hover around the $50/BBL mark for the remainder of Q4, 2017. Throughout 2018 oil prices should incrementally ratchet upwards towards the 60 mark.