As the year approaches the fourth quarter, many industry observers are dusting off their forecasts for 2016 and re-thinking. Last week, HSBC lowered its oil price outlook to $60/bbl for 2016. The EIA, in its latest Short Term Energy Outlook also revised its 2016 projection downward by $8/bbl to $59/bbl. As the oilfield community starts to reflect on 2015, the number one question will surely be: “where is the recovery?”
The problem is that oil remains in plentiful supply. Through the first half of 2015 we have seen a rapid increase in production globally, and particularly from the US and Saudi Arabia. US production peaked in the summer and is now declining but overall we still expect global production in 2015 to have increased by 1.5mmbpd over 2014.
The reasons we have such an overhang in supply are primarily twofold. We have seen record levels of upstream investment between 2011 and 2014 and given the scale of many of these projects there is a lag between the final investment decision (FID) and first production. Offshore projects can easily take four years from FID to first production.
OPEC for the last 12 months has been engaged in a war of attrition with US shale producers, not only refusing to cut supply but pressing ahead with its upstream investments. On the face of it this is a war that it appears OPEC will win, with the hedging positions taken by US producers now expired and many of them facing dire financial circumstances. However, if they do win it will be at the cost of substantial national deficits.
Furthermore, advances in downhole completions have significantly increased the initial flowrates achieved in shale plays in the USA, so whilst production is now declining, well productivity is increasing as the operators focus on the quality of plays.
However, there are signs that the supply / demand gap may start to narrow next year. The latest IEA Oil Market Report projects that oil demand will increase by 1.4mbpd next year whilst Douglas-Westwood’s latest analysis, published last week in Q3 of our World Drilling and Production Market Forecast, highlights additions of only 368kbpd in 2016, followed by additions of nearly 1mbpd in both 2017 and 2018. This tightening of the supply/demand outlook could well be the catalyst for a recovery in both oil prices and in-turn the oilfield services sector as a whole.
Steve Robertson, Douglas-Westwood London
+44 (0)1795 594734 or Steve.Robertson@douglaswestwood.com