A lot can change in 3 years. Cast your mind back to 2016 and the oil and gas sector was in a very different place. The industry was in the midst of one of its worst crises in recent times. Brent was trading in the low $30s and talk at the time revolved around whether it would ever recover, never mind if the price would hit triple figures again.
Fast forward to today though, and we’re in a very different place. Following 18 months of speculation around when confidence would return to the market, at the time of writing Brent is hovering around the $70 mark and naturally we’re thinking about what’s to come next.
Until very recently, there was even speculation that we could be seeing the return of the super-inflated $100 a barrel price. Those predictions may have been put on hold for the time being, but it’s still a topic worth exploring
The question I want to ask isn’t whether or not it will hit $100 again, but if we actually want the price to get to that level. It might seem counter intuitive to even ask, but let’s take a look at who the winners and losers are in a $100 barrel situation.
Countries like Saudi Arabia, Russia and Venezuela’s exports of oil count for a huge chunk of their GDP. So for them and other major oil producers a higher-priced barrel is good news. It means that not only do their profit margin swell, but so does their economy.
Consequently in this situation, they’ll always look to increase production and profits. However, as we’ve seen recently there can be a fine line to walk between supply and demand to maintain a high price.
When oil is more expensive, it instantly makes alternative and more environmentally friendly fuel sources more competitive, and could see a shift towards these sources of energy from environmentally conscious consumers.
We’re also seeing a shift in traditional oil and gas companies’ activities in this area increase. Counter intuitively then, higher profits for huge oil and gas providers could see them biting the oily hand that feeds them and reinvesting outside of fossil fuels.
The likes of BP and Shell have made their intentions clear in this area over recent years. The rebrand of Statoil to Equinor is also a very clear statement of their green intentions.
Higher prices mean more exploration and production and a ramp up in the production and sale of all the associated products needed to enable the increase.
As oil producing countries look to maximise output and profits they will give the greenlight to an increasing number of projects. This results in an increased demand for the affiliated products and services needed to increase that output.
This means service companies will enjoy higher revenues, profits and headcount.
Countries that aren’t major producers of oil need to import. Countries across the EU and China have huge shortfalls in fuel that are made up through imports. A direct consequence of a higher oil price is that the cost of these imports increases, as does the cost of goods that are produced using oil.
This in turn puts pressure on the economy, causing inflation and ultimately cost of living to increase in these countries.
The price of oil is incredibly temperamental and sensitive to a vast array of influences. This could be geo-political situations such as wars in the Middle East or sanctions on Russia or Iran. Similarly it could be OPEC making decisions to increase or cut supply.
A $100 barrel in today’s market would surely represent a truly booming market. History has taught us though, that booms are almost always followed by busts, nowhere more so than in the oil, where in the good times everyone is clamouring to get a piece of the action.
Because of the efficiency of today’s equipment and the advances in technology around the industry production can now increase more quickly than ever. That means that supply can very quickly outstrip demand causing a rapid drop in the oil price, production and a downturn.
At the moment, with the threat of another downturn looming the $100 barrel may be a long way away. And that might be a good thing.
It’s become apparent that stability in the sector is better than a rollercoaster. It’s much easier said than done, but sustainability reduces the risk of crashes and means it’s possible to plan long term without a sudden rush to the rigs.
Lets hope the recovery continues and ends with a stable price that allows us all to plan for the future.
As ever, all of the above is my view on the market but what do you think? Where do you think the oil price will go and is a stable price better for everyone?