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Global Oil Supply More Fragile Than You Think

August 6, 2015

Global Oil Supply More Fragile Than You Think

Many oil companies had trimmed their budgets heading into 2015 to deal with lower oil prices. But the rebound in April and May to $60 per barrel from the mid-$40s suggested that the severe drop was merely temporary.

But the collapse of prices in July – owing to the Iran nuclear deal, an ongoing production surplus, and economic and financial concerns in Greece and China – have darkened the mood. Now a prevailing sense that oil prices may stay lower for longer has hit the markets.

Oil futures for delivery in December 2020 are currently trading $8 lower than they were at the beginning of this year even while immediate spot prices are $4 higher today. In other words, oil traders are now feeling much gloomier about oil prices several years out than they were at the beginning of 2015.

Related: Don’t Expect An Oil Price Rebound This Side Of 2017

The growing acceptance that oil prices could stay lower for longer will kick off a fresh round of cuts in spending and workforces for the oil industry.

“It’s a monumental challenge to offset the impact of a 50% drop in oil price,” Fadel Gheit, an analyst with Oppenheimer & Co., told the WSJ. “The priorities have shifted completely. The priority now is to discontinue budget spending. The priority is to live within your means. Forget about growth. They are now in survival mode.”

And many companies are also recalculating the oil price needed for new drilling projects to make financial sense. For example, according to the Wall Street Journal, BP is assuming an oil price of $60 per barrel moving forward. Royal Dutch Shell is a little more pessimistic, using $50 per barrel as their projection. For now, projects that need $100+ per barrel will be put on ice indefinitely. The oil majors have cancelled or delayed a combined $200 billion in new projects as they seek to rein in costs, according to Wood Mackenzie.

 

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