PORTLAND
MARKET
REPORT
February update
So here we are, back again for another year on
the oil merry-go-round! It’s that time of the
year where we make bold predictions about
the price of oil over the 12 months. But before
we do, let’s consider the 2016 predictions, that
we made this time last year. Back in January
(2016), the oil price was still mooching 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 continued that “these low oil prices will
not last and a level around the $40-$50 mark,
seems likely by the end of this year”. And that’s
pretty well what happened, with the price of
oil recovering back up to the mid $40’s by the
middle of the year. It then stayed roughly at
that level until OPEC’s now infamous meeting
in November, where production cuts in
conjunction with Russia were agreed and prices
jumped up another level, finishing the year just
above $55 per barrel.
2017 – MOST POINTERS
DO STILL SEEM TO
INDICATE ANOTHER YEAR
OF PRICE RISES
For the most part then, we got our forecasts
right for 2016. But then again, we weren’t
the market observers who concluded that the
massive drop in oil prices to a low point of $25
per barrel had been overdone, smacked of
trading panic and would almost certainly be
short-lived. In simple terms, the only obvious
direction for prices this time last year was up
and making that prediction wasn’t the work of
a genius.
Looking at 2017, the situation is less clear
cut, but most pointers do still seem to indicate
another year of price rises. Perhaps not at
great speed and nor on a grand scale. But
nonetheless, a consistent edging up of prices
throughout the year is how we see things and
by the end of 2017, $65 per barrel is not at all
beyond the realms of possibility.
ANOTHER YEAR ON THE
OIL MERRY-GO-ROUND
On the surface this could be viewed as
a reckless prediction as all recent experience
would indicate that high oil prices will quickly
bring the shale oilers back into the market, thus
generating a supply glut and a subsequent
drop in prices. Certainly all the indicators
on the ground would back this up, with the
shalers poised and itching to get back onto
the scene when prices are attractive enough.
But let’s forget reality here. However keen the
remaining shalers are to get pumping again,
there is no getting away from the fact that
many of the operators from 2014 have now
gone bust, many of their wells have been
mothballed and most significantly of all from a
time perspective, much of the available skilled
labour has drifted away into other industries.
So when the shalers do come back into
the game, they will initially face a different
and more difficult operating environment.
Firstly they will have to pay higher wages to
lure skilled workers back into the sector. Then
they will have to negotiate hard with the still
smarting oil service firms, who will be trying to
recoup as much lost revenue of the last two
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 and full
blooded production levels will be unlikely until
the back end of the year.
In tandem with all of the above, we must
also remember what has happened to the
conventional oil industry (ie, 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 investment in
conventional oil has clearly compounded the
sickly state of non-shale exploration, such that
an 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. With OPEC cuts kicking in,
conventional oil yields seizing up and the shale
oil industry only making tentative movements
to get back into the fast lane, it’s difficult to see
where the downward price pressure will come
from. But if and when we do find ourselves in a
$60 + price environment, then it’s at that point
that things may start to get a bit too gung-ho
(as is normally the way in the oil industry). If
the shalers repeat the production “excesses”
of 2014 (perhaps encouraged by the Trump
Administration?), then a supply glut and
consequent price crash would surely follow. But
hey, let’s leave the 2018 predictions until this
time next year…
BY THE END OF 2017,
$65 PER BARREL IS NOT
AT ALL BEYOND THE
REALMS OF POSSIBILITY
For more pricing
information, see
page 26
Portland Fuel Price Protection
ection
www.portland-fuel-price-protection.com
Fuel Oil News | February 2017 7