A down and up year for the oil price
In the first half of 2017 the oil price dropped before climbing steadily
During the first six months of 2017 the price of oil tumbled erratically, in a manner that did not seem promising for an oil industry that had seen a significant price recovery during the previous year. The tumble came despite a late 2016 agreement on oil production quotas by most countries in the Organization of Petroleum Exporting Countries and by Russia.
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However, during the second half of the year, the price recovered steadily to above $60 per barrel by year end, and since then has continued to climb. And a graph of the oil price since the beginning of 2016 seems to show that early 2017 price drop as something of a glitch in an overall upward trend.
Commentators have attributed the early 2017 price drop to the fact that Libya and Nigeria were not part of the 2016 OPEC agreement, and to U.S. shale oil development rising in response to the OPEC action. Subsequent time extensions to that original OPEC production agreement appear to have now lent support to a more robust oil price.
Excess supplyIt is generally agreed that the tumble in oil prices in 2014 resulted from an excess of oil supplies, rather than a shortfall in oil demand. And, the fact that the downturn has been supply driven has caused the oil price to remain low for a relatively long time. In particular, an overhang of large inventories of stored crude oil has kept the price depressed. Interestingly, an inspection of the oil price trends and the trends for U.S. oil inventories shows a fall in U.S. inventories preceding the pickup in the oil price in the second half of 2017, with that inventory decline continuing to the present.
A major unknown when it comes to future pricing is the impact of U.S. shale oil production. This type of production can ramp up and down relatively quickly in response to oil price signals, although there may be constraints in terms of the willingness of investors to put money into development, given recent oil price volatility. Industry commentators have been reporting increasing shale oil investment and development in response to the recent oil price rise.
Commentators have also suggested that Middle East political tensions, particularly between Saudi Arabia and Iran, are currently driving up the oil price because of concerns about potential disruption in oil production.
Industry outlookBP, in its latest Energy Outlook, published in June, expressed a view that rising oil demand had brought oil supply and demand back into balance, albeit with continuing high oil inventories. The precipitous fall in oil prices in 2014 had primarily resulted from supply growth from U.S. shale oil development, Spencer Dale, BP Group chief economist, suggested.
In April Marianne Kah, ConocoPhillips chief economist, expressed a view that U.S. shale oil had upended the global oil market, causing oil companies to focus on resources with the lowest cost of supply. And ongoing shale oil productivity improvements are continuing to push down the supply cost for tight oil, Kah said. S&P Global Platts, on the other hand, in its oil and gas outlook for 2018, has anticipated strong oil demand growth creating some supply tightness in the near term.
Alaska impactFrom an Alaska perspective, the price of oil is obviously critical both to the viability of the oil industry in the state and to the state’s fiscal situation - state finances are particularly dependent on oil revenues from royalties and production taxes. But, while the continuing oil price rise is welcome from both industry and state perspectives, people are being cautious in their expectations for the future.
The state, it its most recent revenue forecast, has assumed a price level of around $56/$57 over the next couple of years. In November the U.S. Energy Information Administration suggested 2018 pricing at around that same level. Moody’s Investor Service has projected oil prices in the range of $40 to $60 in 2018. And major oil companies have indicated that their forward planning assumes continuing relatively low pricing.
Company policiesKah said that the supply cost target for beating shale oil economics has moved down to a range of $30 to $50, and that ConocoPhillips now has a policy of only investing in lower cost of supply projects. This policy protects the company against future oil price changes, she said. In November company executives told an analyst and investor meeting that the company anticipates being able to achieve all of its financial targets at a $50 oil price, that sustained pricing below $45 would require cost deflation and capital flexibility, and that the company could maintain oil production levels unless there is sustained pricing below $40.
During the World Petroleum Congress in July, BP CEO Bob Dudley said that BP is planning on $50 oil for the next five years. During a later earnings call, Dudley commented that his company’s organic cash flows were in balance at a $50 price and that the company’s target breakeven price was well into the $30s.
Despite the high cost of oil exploration, development and production in Alaska, the state’s oil industry does appear to be weathering the oil price storm, with North Slope production actually increasing somewhat. However, pressure on operating costs has hit the service industry and oil company employment levels in the state.
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