On the 25th of May, OPEC (Organisation of the Petroleum Exporting Countries) are meeting to discuss their plans for the next 6 months. This means that the world is once again talking about the price of oil, production cuts, and the economic impact that this will have on a host of international economies.
Leading up to this, and after a tumultuous 3 years across the sector, I’ve taken a look at the state of the sector at the moment, why we’re here, and what the meeting could mean for the rest of 2017.
Since the end of 2014, times have been tough in Oil and Gas. In late 2014, the price of Brent and WTI (the 2 global markers for the commodity) went off a cliff.
This has been devastating for everyone working in the market.
Since said plunge, we’ve seen in excess of 350,000 job losses across the globe as of 2016, with 150,000 being lost in oilfield services alone. Closer to home, it’s been estimated that more than 120,000 people in the UK have been left out of work due to the price drop and affiliated knock on effects.
Everyone who chooses to work in oil knows that it’s a volatile market – they also know that it’s well paid, which is probably why we haven’t seen an outpouring of sympathy to those left unemployed. This low has been going on a long time though, and many are now asking when it will end.
A major problem with making this prediction is the fact that the price of oil is near-impossible to predict so, taking that unpredictability into account, were there any warning signs about this crash?
Whilst we may struggle to predict the future, you can look at the past; if we’re looking for a cause of the sharp decline in price in 2014, the first thing to do is look back at is how the price of oil increased from 2000 – 2008. In this period, we saw the price of a barrel of oil jump from $25 to $150 USD. This dropped again after the 2008 recession, but the initially high benchmark set up the price of oil on shaky foundations which have had a knock on effect to today’s market.
In that period, emerging powerhouse economies like China and India had a seemingly insatiable appetite for oil. The Chinese government was also subsidising fuel costs, allowing consumers and businesses to consume fossil fuels at a ferocious rate without being affected by the inflated prices. Demand was high.
There were also number of geopolitical factors which affected supply; concerns around Iranian nuclear ambitions, Hurricane Katrina and the 2006 Israel – Lebanon conflict all affected oil production in some way, and raised concerns about potential shortages – again making the price rise. Supply was low.
Higher demand + lower supply = higher prices.
It’s the most simple economics.
We all know what happened in 2008: the world was hit by recession. The price of a barrel of oil plummeted from over $140USD in July to less than $35 in December ‘08, and the world was in turmoil. As the banking crisis hit, production in new economies dropped, subsidies were cut, and demand fell.
Like many industries, post-recession, the energy sector was desperate for the fastest possible recovery and, back then, OPEC took matters into their own hands to stabilise the market.
The decision by OPEC to cut production by a massive 12% in the last quarter of 2008 did a lot to help stabilise prices, as supply was reined in. This led to a quick improvement in price, if not a recovery, by mid 2009.
This was a swift, but artificial, stabilisation. Even back then, in 2009, some had concerns about how quickly things had got better, potentially ahead of its’ time. Some commentators expressed their concern that prices could fall again as those that had slowed down production would be eager to get back up to full capacity, which could potentially flood the market again.
The crash in 2008 could have been a stabiliser for the market, and represented a chance for oil prices to reset far away from pre- recession levels, but instead people chose to see the 2008 crash as a mere bizarre and temporary tick in the wrong direction’. This optimism meant that the warning signs were ignored as businesses and producers clambered to get back to where they were pre-crash.
The quick fix worked though – a collective desire for optimism, combined with a proactive approach from OPEC and continued concerns about the US economy meant that prices were inflated to more than $110 a barrel by mid 2014. Good times!
More upbeat news.
At this point, we’ve come full circle. In June 2014, everyone was once again enjoying the soaring price of oil, without acknowledging the fact that the world had changed, and learned, from 2008. Another crash was building, both from the East and West.
Firstly, oil prices aside, the major financial institutions had been burned by the 2008 crash, and the growth of emerging economies was slowing. China’s thirst was no longer unquenchable, which meant that the demand for oil was slowing.
Next, the US and Canada, unhappy with the cost of importing expensive oil and gas, ramped up their efforts to extract oil from their own territories amidst a recovery in their own economies. Canada was exploiting Alberta’s oil sands, and in the US, fracking was booming. The emergence of multi-stage frac technology made for more efficient extraction of resources from wells across the US, meaning that their demand for imported oil fell sharply, as smaller producers began drilling using borrowed money.
These two ingredients had been mixing slowly, which meant that the shift from supply outweighing demand wasn’t a sudden, cataclysmic shock – it had been building for years – this meant that there was less of a universal attitude of ‘let’s sort this out’ and a deeper, more ingrained problem.
At this point, in late 2014, the oil producing world once again looked to OPEC. Since their last cuts in 2008, OPEC had been continually increasing production to try and recover the damage done back then, and help it’s own members capitalise on higher oil prices.
The world had changed though.
In 2008, OPEC had a great deal of power when it came to controlling the price of oil, but by 2014 the US had emerged as a major producer too. This left them with a choice: cut production again (which would now mean ceding market share) or hold firm and try to ride out the oil prices.
By October 2014, OPEC had made their choice. In a major power play, the Saudis, OPEC’s biggest player by far, actually opted to cut costs but not production for their best customers, signifying that they would ‘rather defend its market share than prop up global oil prices’. Saudi Arabia had both the largest reserves, and lowest production costs, of oil on the planet, so this was seen as trying to muscle the newer players out of the market.
So, the current crash had all the excitement of the 2008 drop, with none of the desire to rectify it. The global need for recovery after 2008 had effectively inflated prices to such an extent that they were now susceptible to the changing market conditions and the bullish attitudes of OPEC and other players on the market.
One reason for the prolonged lows has been the re-introduction of Iran. The nuclear concerns that I touched on at the start of the article had been allayed, and sanctions on Iranian exports were lifted at the beginning of 2016.
The Iranians didn’t hang around with their production. Throughout 2016, they immediately decided to ramp up production, regardless of global supply. This meant that the market was further flooded, pushing back the possibility of a 2016 recovery.
Iran’s back Source: CNN.com June 2016
Iran is also a major rival of Saudi Arabia making them, and therefore OPEC, even less inclined to cut production. However, it couldn’t last forever.
In November 2016, OPEC finally blinked and cut production – but only after supply had outweighed demand so much that oil reserves climbed to the highest point they’d ever been, which was further than many commentators thought it would go.
To some extent, their plan did work too - the OPEC refusal to cut production and continued low oil price did mean that American production calmed down somewhat, as fracking is expensive, but not enough.
Now though, it’s May, it’s 2017, and OPEC are meeting again. On the face of it, that could be good news. All signs point to production cuts being extended (the Saudis and Russians have agreed to them), but as prices begin to rise, this is causing more and more US producers to start back up, as their expensive extraction processes once again become viable.
What we’ve seen over the past 9 years is a shift away from OPEC having a stranglehold over the world’s supply of oil; they can no longer single-handedly bring oil prices up or down at will. According to OPEC’s recent estimates, US production is forecasted to rise by 1 million barrels per day in 2018, which will inevitably lead to supply outstripping demand next year (again) which could further prolong lower prices.
Historically, after a price crash, oil tends to recover, and even boom. On this occasion though, we haven’t seen it. It’s almost been 3 years since things started to go south, and given what has happened so far, it’s impossible to predict exactly what will happen next.
So this is what we can say: oil inventories have become more stable of late, and many are now looking back on the post-2008 recovery as something of an anomaly. The emergence of the US as a major producer of oil combined with the fast OPEC action worked to create a ‘perfect storm’ of consequences to prolong lower prices.
The fact that Russia & Saudi Arabia are opting to continue production cuts can only be positive when it comes to stabilising the market, and ultimately helping people get back to work in places like the North Sea, where oil is expensive to extract.
I’ve watched this play out from a recruitment perspective and, when I look forward, things do seem to be looking up. Granted, we aren’t seeing the spontaneous hires and extraordinary salaries of 2014, and companies aren’t biting our hands off just yet for candidates, but businesses are hiring. What a lot of companies are saying is that we’ve now been left with a much more ‘lean’ and ‘fit for purpose’ energy sector that, when things do fully recover properly, will be much better placed to cope with the modern day market and its’ demands.
We may never get back to the $100 per barrel levels that we’ve seen in the not too distant past, but at the current mark – around $50 per barrel – doors aren’t being slammed. In the recruitment space we’re hearing lots of words like ‘tentative’ and ‘cautious’ when it comes to Q4 2017 and 2018 predictions, but those predictions are optimistic nonetheless.
One area we’ve seen growth in is with some candidates take the plunge into consultancy roles, - more flexible for them and with less risk attached for the employer, which is opening up doors - and there are also potential opportunities for candidates in the neighbouring utility and renewable energy sectors. However, that market is now mature enough (and has gone through a number of its’ own changes) that there are also many professionals in that sector looking for something new, which is another article entirely.
As I said at the start, oil and gas is a volatile market to be involved in, but a fascinating one. Regardless of the numerous downsides to it, it never fails to excite or inspire when it comes to the recruitment space, and I am always thrilled and motivated to be a part of it, and I look forward to helping more businesses to recover from the last couple of years as they come blinking into the light, looking to improve their teams.
We’ll all be watching on May 25th with baited breath, hoping that we do see an extension to cuts, which will help the hundreds of thousands of victims of job losses start to make their way back to work.
I’m really keen to hear your feedback on everything I’ve mentioned here. If you want to have a chat about any of the issues I’ve mentioned, or even about the sector in general – make sure to get in touch.