These days, when talking about oil prices, the terms “lower for longer” and “the new normal” have become almost mantra-like.
And it is not as if oil prices are in the doldrums. Brent crude has averaged $54.51 this year and has traded above $60 per barrel since end-October.
The worst may be over for the oil and gas industry — it had been languishing for the past three years — but not many expect the good old days, when crude was trading above US$100 per barrel, to be back anytime soon.
This explains the persistent selling of oil and gas stocks on the local market, which has battered the share price of many of the companies. TA Securities forecasts crude oil to trade at an average price of $60 per barrel in 2018 and $65 per barrel in 2019, backed by improved global demand and sustained production cuts after averaging at about $55 per barrel in 2017 and $48 per barrel in 2016.
“Our expectation of stronger oil prices is underpinned by both fundamental and sentimental drivers, namely sustained production cuts by OPEC and non-OPEC producers and optimism that Saudi Arabia will escalate efforts to champion an oil price recovery,” TA says in its outlook for 2018. The research outfit is “neutral” on the sector.
Much of the gains in oil prices are a result of oil output cuts by Opec and non-Opec producers led by Russia, which started in early 2017 and are slated to last until the end of 2018. Opec and Russia collectively account for over 40perent of global oil output.
Yaw Yan Chong, Thomson Reuters supply chain and commodities research (oil) director for Asia, however, points out that the cuts in 2017 had been minimal.
As at October, total exports by Opec remained high at an average of 33.23 million barrels per day per month, although this includes Indonesia, which suspended its membership in only January 2017. This is not far off the 2016 average of 33.23 million bpd/month which included Indonesia.
“My point is that Opec production is still very large despite the cuts … This is the same for Russian production, which averaged 10.94 million bpd/month up until September, which is still an annual record-high, versus the 2016 average of 10.76 million bpd, which was also a record-high at the time,” Yaw says.
An oil and gas industry observer says she is not bullish on the sector. “Capital expenditure is down a lot, which, in turn, translates into fewer jobs, but the number of players remains the same. There has to be consolidation.
“[There seems to be] no light at the end of the tunnel. It’s tough. There’s too little work to go around and there are too many players … just look at the Petronas report.”
The Petronas Activity Outlook 2017-2019, which was released does not paint a rosy picture of the industry. Opening up the report may be the national oil company’s way of alerting the players to the difficult climate.
In the period under review, there were 20 greenfield and 30 brownfield projects in the upstream sector, up from 15 and 25 respectively expected in the first Petronas Activity Outlook report.
“We need to reshape the Malaysian oil and gas ecosystem so that the companies that operate here will be more efficient, with the size and economies of scale that will also make them more resilient and competitive globally,” Petronas CEO Tan Sri Wan Zulkiflee Wan Ariffin has said.
Thus, while oil prices may have somewhat recovered, the industry players are not out of the woods yet.
Source: The Edge