An eventful year-2016 is just completed and the New Year 2017 is expected to deliver results for all; a Good Luck wish is much desired for the oil & gas sector. It seems in 2017, oil price dynamics will continue to remain uncertain and volatile. The bright spot is that most of the projections, including from the World Bank, indicate that oil price is on recovery path but it is far away from the sweet spot. EIA forecasts Brent crude oil prices to average $52 per barrel in 2017 compared to $43 per barrel in 2016, close to 21% upward correction. West Texas Intermediate (WTI) crude oil prices are projected to average about $51 per barrel in 2017.
The World Bank prediction is giving a more optimistic oil price value of $55 per barrel. Whereas BofA Merrill Lynch predictions are highly optimistic with WTI Crude priced at $59 per barrel and Brent – at $61 per barrel in 2017. Investment bank Goldman Sachs predicts average WTI price to be $55.6 and Brent to be $57.4 in 2017. Such optimistic predictions would make the upstream investors quite hopeful if not very comfortable. History suggests that oil price predictions have been tricky, therefore on many occasions’ forecasts have been missed by miles. Generally, predictors either over estimate or underestimate oil prices. Now most analysts are inclined towards a bullish oil market. On the contrary Standard Chartered Bank predicted oil prices falling to as low as $10 per barrel in 2016 — such a slump was last seen during the Asian financial crisis in 1998. Arguably, the prediction completely went wrong. Rather oil prices have shown good recovery towards the end of 2016. The upward oil price corrections are likely to continue in the first half of 2017 and the second half may deliver even better performance.
Factors affecting price
Major factors which influenced price of crude in 2016 include oversupply, strengthening of US dollar, increase in US crude stock, and delayed production decision of the OPEC. Fall in crude prices resulted in lower revenue realization for oil exporting countries. As a result most of the OPEC countries suffered severe financial loss. To keep their economic activities going OPEC countries were forced to maintain the production level beyond expectation.
Hope for growth
Despite slight sluggish projected growth in China and India , higher global economic growth of 3.1 percent is projected in 2017 compared to 2.9 percent in 2016. Loss of economic growth in China and India is expected to be compensated by the revival in Euro-zone, Japan, Brazil, and the USA. As a result, in 2017, world oil demand is projected to grow by 1.15 million barrel per day to average 95.56 million barrel per day. Despite marginally lower projected growth, oil demand in
India is projected to increase from 4.33 mb/pd in 2016 to 4.49 mb/pd in 2017.
As per OPEC Monthly Oil Market Report of December 2016, in 2017, demand for OPEC crude is expected to be at 32.6 mb/pd and Non-OPEC supply is expected to average 56.50 mb/pd. At the 171st Ministerial Conference, OPEC decided to implement a new OPEC-14 production target of 32.5 mb/pd, effective from 1 January 2017. The production rationalization decision of OPEC is intended to address the oversupply and alter prevailing global crude oil prices. However, the real impact on crude prices may be minimal as prices of global crude are dependent on many other factors. Tsvetana Paraskova raises plenty of questions over implementation and sustenance of OPEC production cut. Bloomberg reports that OPEC dynamics are principal driver of global crude fundamentals , therefore close monitoring of administrative and operative decisions of OPEC is critical to understand pricing dynamics.
Exploration & Production Outlook
Due to oil price slump in exploration & production (E&P) activities total rig counts in the USA has fallen from 737 in the year 2015 to 597 in 2016, 19 percent year-on-year drop. However, on the backdrop of projected oil price, the US oil and gas companies are expected to speed up E&P activities in 2017. Similarly, oil & gas companies in OPEC countries, Europe, and other oil & gas producing countries are expected to step up E&P activities in 2017. Almost $50 billion of U.S. upstream merger & acquisition deals were announced in 2016, higher than the $30.7 billion for 2015. This is a clear indication that an anticipated price recovery excites the investors. Further, better pricing may act as a catalyst for revival of unconventional oil and shale gas activities in the US 2017.
The OPEC Bulletin (Oct. 2016) highlights that the oil & gas industry, especially the upstream faces multiple challenges such as: the uncertain prospects for the global economy; managing excessive speculation; geopolitical dynamics; attracting investment, managing advances in technology for efficient exploration and production; and environmental and sustainable development. Further, during the downturns bringing together all the stakeholders to develop comprehensive approaches to address complex issues remains as challenging as before. These challenges will continue to remain in 2017 and beyond.
Global oil & gas industry is on the recovery path which is going to strengthen in 2017. Oil price is predicted to be in the reasonable zone of $55-60 per barrel, which would reduce stress on E&P sector. Slump in oil price proved beneficial for Indian economy and downstream companies strengthening their financial position. The government’s strategic decisions and policy reforms in the petroleum sector are poised to bring positive results starting 2017. All segments of petroleum sector namely: upstream, mid-stream and downstream are expected to attract higher investments. Improvements in the areas of oil & gas production, LNG infrastructure, pipeline network, and CGD network would be seen in 2017. Mr. Modi’s drive for cashless society would have bigger impact on petroleum sector. The petroleum retail outlets are going to play a critical role to make cashless society a reality.