The current outlook for oil has the experts predicting everything from low $40s all the way up to the mid-$60s. There is little in the way of consensus as to what is in store for oil prices for the next twelve months. The one thing that everyone can agree on, is that there is no shortage of potential turbulence ahead in the oil markets, the outcomes of which do vary depending on whether you land on the case for the bulls or the bears.
Oil Markets: The Only Certainty is Uncertainty
We Could See Oil in the $60s…
It has undoubtedly been a stellar start to the year for oil prices, the best ever start to a year in fact.
There are a number of factors that could point to a continuing upswing in oil price. As we approach the summer, as with every other year, refiners will start to draw down current inventories in readiness for the driving season in the US, we are already seeing this play out. We are also seeing the Chinese government introducing measures to try and further stimulate their economy, given that growth has been tapering off considerably. And, on the surface at least, we are seeing the Saudi’s not only sticking to the agreed OPEC production cuts but are talking about potentially extending the cuts, something for which they have support from the Russians.
Further production cuts, if agreed to by other OPEX members (not a foregone conclusion) as well as the Russians, could see a boost in the oil price, especially given that we have potentially lost Venezuelan production in the short term at least, while that country resolves its political turmoil. These are some of the reasons why the bullish sentiment suggests that we could see oil in the $60-$65 range before the year is out.
…Or in the $40s
Other factors to consider? The outcome of the US/China trade talks, along with the implications of Brexit. For these and many other reasons, the US Dollar remains an attractive currency haven.
However, the bullish thesis unravels on an increasing number of current and potential challenges that could take oil back into the $40s. Not least of which is the continuing strength of the US Dollar. A strong dollar will create downward pressure for oil prices; news out of the European Central Bank (ECB) to hold rates for the remainder of 2019 at least, to try and stimulate a lackluster economy only provides more fuel for the continuing strength of the US dollar.
Further pressure on oil prices comes in the shape of downward demand in Asia, particularly in China. As we have come to appreciate, Asian demand is a key driver for oil prices. Looking at current data coming out of Asia does not generate confidence; manufacturing, factory orders and utilization data all negative. It is not just China; Japan and Korea face similar challenges. Then there are the rising geopolitical tensions between India and Pakistan. If tensions continue to escalate, we will see further dampening of demand. Again, all pointing to bad news for oil prices.
How Do Oil Companies Respond?
There is still a tremendous amount of confidence in the bullish thesis for oil. Capital budgets, especially amongst the independent Shale Operators, suggests that we are seeing a ramping up of drilling and completions activity in the year ahead, especially in the key basins in the US.
Companies can either let the markets dictate capital budgets and activity or be masters of their own destiny. Given the numerous factors that point towards market turbulence, Operators should be taking a leaf out of the Exxon playbook; the company is taking considerable measures to drive optimization of capital and operating budgets, ensuring that it is not the markets that will drive their business and operations strategy.
Many of our clients are working very hard to squeeze every cent of value from their capital spend, by not only driving inefficiencies out of their drilling and completion processes and activities but also looking to technology to innovate and drive additional improvements. Each of the operators that we have worked with, have been driving internal improvements for many years, and continue to deliver considerable improvements in cycle-times and cost. But, our experience indicates that there is always the potential for driving further improvements. The low-hanging fruit has long gone, now it is more about innovation and collaboration, and critically, how do you engage the entire organization to Turn Potential Into Reality?
We believe that it is no longer about “Continuous Improvement” but “Discontinuous Improvement,” to really drive the organization to think out of the box, and develop innovative solutions to age-old problems.