By Eithne Treanor
The new normal for the oil market continues to see prices hover below US$50 a barrel. The lower price is beginning to worry the oil majors as they begin to issue fourth quarter results this season. In early trading on Friday, Brent crude was trading just below US$49 with WTI now above US$44 a barrel.
WTI hit a near six-year low and inventories hit record highs this week. Production continues to be high with over-supply on the market, global demand remains sluggish and investment is beginning to suffer.
Producers are reducing operating costs where possible, insisting on more competitive pricing from suppliers and cutting back off non-essential workers.
The OPEC Secretary General, Abdalla El-Badri warned about the dangers of pulling investment in this fragile market and said in Davos this week that the price could go as high as US$200 if the industry fails to keep up with much needed investment.
The chief economist of the International Energy Agency, Fatih Birol said that he expects investment in oil production to fall by US$100 billion, or 15 pe rcent, this year compared with 2014.
Despite the glut of oil on the market, and opposition from American President Obama, the new Keystone XL pipeline got approval from the Republican controlled Senate.
This defies the presidential veto threat that will lead to many passionate debates and increased lobbying in the months to come as politicians and environmental groups determine the future of American energy transportation and distribution.
The State department has already said that the pipeline can be built with protection of the environment in place and more importantly, job creation of about 42,000 new positions. House speaker John Boehner called it a “common-sense bill,” while some democrats have referred to it as a “disgrace.”
The Keystone XL pipeline bill was first heard in 2008 when TransCanada Corporation presented the 1,179-mile pipeline at an estimated US$8 billion to build. The route will be from Canada to Montana and South Dakota to Nebraska where it would connect with existing smaller pipelines to transport oil to the Texas Gulf coast. The big oil companies support this move, as does the American Petroleum Institute, claiming it will enhance jobs as well as energy security.
There may be stronger oil demand from China, at least in the short term. The price at the pump is lower for Chinese consumers so that should help drive demand. More importantly, new Chinese regulation will have the country importing more oil for commercial crude storage and refinement.
The refineries in China are now expected to store enough crude to last an average of 15 days. Traders expect many refineries to take advantage of the current low price to meet this new requirement. China is currently the biggest importer of oil according to Goldman Sachs and the world’s second biggest consumer. GDP growth in China in 2014 was 7.4 percent, the slowest in 24 years.
Despite this short-term support from China, many analysts say that the overall global market outlook, especially in OECD remains weak. All producers appear to be keeping output high and most are surviving, while gradually adjusting to the lower-price environment, citing long-term growth projections as their future saving grace.
It’s estimated that China could save approximately US$100 billion on its oil import bill, according to Boqiang Lin, a leading economist and dean of the China Institute for Energy Policy Studies speaking at the World Economic Forum in Davos this week. The governor of the People’s Bank of China, Zhou Xiaochuan said he expects lower oil prices to give China “momentum and job creation,” and help drive more economic reforms.
Major listed companies have begun delivering essential fourth quarter results and while the average Brent oil price for 2014 was not far below US$100 a barrel, the falling price impact towards the end of the year is now being felt.
Shell was the first of the international oil companies to deliver results with earnings up 12 per cent on the same quarter last year. This was lower than expected and still disappointed the market, losing a 5 percent share in its stock price on the announcement.
While Shell’s earnings were better than 2013, the decline in earnings in the fourth quarter were the main concern. Net income was down 57 percent. The company’s CEO Ben van Beurden said it was important not to “get into a slash-and-burn mentality,” and added that he expects the oil price to rebound to between US$70 and US$90 in the longer term.
Shell said it would cut back some projects and reduce spending by approximately US$15 billion in the next three years. Shell said it still intends to go ahead with drilling plans in the Chukchi Sea in Alaska this summer if permits are approved.
Chevron will report later on January 30th and we can expect results from ExxonMobil on Monday, 2nd February. BP is looking at better profits on 3rd of February and the French oil company Total will deliver its expected lower fourth quarter earnings on 12th February.
Good news for Total from the United Arab Emirates this week as the company was among the first to be awarded one of the lucrative oil concessions for the next 40 years in fields around Abu Dhabi.
The state-run Abu Dhabi National Oil Company, ADNOC said that Total would get a 10 per cent stake in the operation of the Emirate’s biggest oilfield as well as operations covering Abu Dhabi’s 15 main onshore fields, representing more than half of the oil production in the UAE. Commercial details were not disclosed but ADNOC issued a statement that Total “presented the best technical and commercial offers.”
More announcements from ADNOC are expected soon with Shell and BP waiting for news. Other smaller bidders include Korea National Oil Corporation, Occidental Petroleum, Italy’s ENI, China National Petroleum Corporation, Russia’s OAO Rosneft, Inpex from Japan and Statoil from Norway.
ExxonMobil stayed out of this concession renewal bid round as the company has other commitments on the Upper Zakum offshore fields. The awarding of these concessions is a year behind as ADNOC took its time to analyse the bids.
The oil price appears to have hit a plateau and low though it is, the market will welcome a sense of stability, in the short term. Everyone, particularly OPEC is hoping that the price will re-bound in the coming months.
The big danger will be any major reduction in investment and capital expenditure; issues all producers and oil companies will be examining as they look at end of year results and projections for the year ahead.