Industry Overview – October 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.

  • Most oil producing primaries are finally accepting the notion that a production freeze is needed to move forward in a sustainable way, expressed in their recent dialogue.
  • Iraq has just announced their unwillingness of committing to a production freeze, citing their production at only 4-MBBL/day vs. their historical production (pre-gulf wars) at 8-MBBL/day
  • It is most likely that we experience an sustained altitude of approximately $50 +/- $5 / BBL WTI throughout the last quarter of 2016, with increasing equipment utilization up by approximately 10% over the same period last year and paralleled remarketing potential.
  • Eventually increasing demand, (estimated at 1.2-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 oil prices will hover around the $50/BBL mark for the remainder of Q4, 2016. Throughout 2017 oil prices should incrementally ratchet upwards towards into the high fifties, assuming only mirror variance in above influences and continued consumption increase over stabilizing production trends.