Industry Overview – September 2016

  • On Feb 16, 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 this year, while still maintaining market share, a lofty plan that hasn’t worked. On any given day, global oil supply of about 96.5 million barrels outstrips demand by almost two million barrels.
  • 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.
  • 2015/2016 winter was one of the warmest in nearly 60-yrs, expected consumption fell short, adding to stockpile inventory.
  • Approximately 70% of global oil production is consumed as transportation fuel, the 2016 driving season in the US was soft, resulting in refiners remixing summer blends into winter blends, effectively pushing the bloated inventories into the fall.
  • Soft demand and less than optimistic economic performance from China has levied additional concerns.
  • OPEC is nearing maximum production capacity at 33-MM/BL/day, however there is still considerable production capacity from non OPEC members, like US shale producers and Russia.
  • The overall decline in global oil prices has added an element of conservatism in virtually all oil and gas related equipment valuations.

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. However, there are a number of factors today that suggest that the market and conversely equipment values will continue to be relatively soft for some time to come.

  • Production capability and the financial need for countries to produce has never been greater, oil production and demand needs to be balanced, (annalists suggest an averaged sustainable price of $65/BBl is necessary to maintain market equilibrium).
  • Oil producing primaries are finally accepting the notion that balance is needed to move forward in a sustainable way, expressed in their recent dialogue, mentioned above.
  • It is most likely that we experience sluggish oil prices throughout the last two quarters of 2016, with paralleled equipment utilization and remarketing potential.
  • Eventually increasing demand, (estimated at 1-MM/BBL/Day per annum) will overtake supply capacity, given the current rate of new oil discoveries at a 70-yr low.

If current trends uphold it is likely that incremental recovery should gain traction by the forth quarter of 2016, with oil forecasted at low fifties by end of Q4 2016 and ultimately into the mid sixties by the end of 2017 or early 2018.