The oil industry is facing another tough year ahead. Here are five top trends that will dominate the oil markets in 2016.
Oil glut will continue well into 2016
The previous year was tough for the oil industry. Since June 2014, oil prices fell by more than 60% and they are rapidly reaching levels unseen since the beginning of the financial crisis in 2008. The cause lies in a massive oil glut of 2 million barrels of excessive oil that will not go away that soon, and sluggish demand that primarily comes from the shaky Chinese economy. In addition, the OPEC countries are continuing to relentlessly pump new barrels, while Iran prepares to rapidly increase its production after the termination of the sanction regime.
Exporting countries face rising political risks
Low oil prices strongly affect oil production, and in many cases politically unstable countries such as Nigeria, Venezuela, Iraq and Libya. Unlike Russia and Saudi Arabia that can sustain price shocks for longer due to their large hard currency reserves, the less fortunate ones are facing the risk of political and social upheavals as their oil-financed budgets continue to shrink. Some oil exporters lost as much as 50% of their oil revenues over the past year and a half, which creates a huge strain on their finances. Considering the high dependency on oil exports and already present political instability, Venezuela and Nigeria are particularly sensitive to the current price environment.
Massive cuts threaten to propel oil prices
According to the energy consultancy Wood Mackenzie, around $1.5 trillion of capital investments in new oil projects is likely to be postponed and cancelled at prices bellow $50 per barrel. The US shale sector will bear the brunt of these cuts, but other capital demanding projects will be equally affected. The recently published OPEC’s 2015 World Oil Outlook forecasts that global economy would need around $10 trillion of new investments by 2040 in order to prevent massive shortages and energy demand rise of up to 50%.
Significant cuts in financing new oil projects are a hidden danger that might cause a supply shock and propel oil prices upwards already in 2017. Although low prices cause headaches to oil companies, investing in oil giants might be a good long-term decision, considering their current low share price and generous dividends.
Dwindling shale industry poses a hazard for the US financial sector
The US shale sector is without a doubt a major victim of the oil price slump. Since the start of the crisis in the oil sector, 41 US oil companies filed for bankruptcy, and the industry lost around $30 billion in the first half of 2015. Another wave of bankruptcies is expected in 2016 as low oil prices and the Fed’s decision to raise interest rates put additional pressure on the US high-yield bond market. The Swiss bank UBS estimates that around $1 trillion of US corporate bonds and loans is facing default, with around 20% related to the oil and gas sector.
Markets will gain from new balance of energy power
Despite current woes and the price war with OPEC, the US shale sector will eventually come out from the current barrel conflict as a winner. Its main strength lies in the independent corporate structure, stable political and financial environment, and the ability to quickly respond to free market conditions.
As supply and demand rebalance takes place and oil prices stabilize, the US shale industry will benefit from the current consolidation and Congress’s recent decision to lift the crude oil exports ban. In strategic terms, the newly acquired role of global swing producer will allow less geopolitically caused volatility in oil prices, and give the US a powerful tool to increase its global influence.
With 30% market share, OPEC and Saudi Arabia will remain an important factor in global energy markets, but they will not be able to resume an almost absolute control over the oil markets, which they have enjoyed in the past. This will further expose their high dependency on oil exports, and force them to readjust their economies. Many of them might find the process to be painful and perilous.
