The Oil Industry in 2016: Volatile and Vacillating

The Oil Industry in 2016: Volatile and Vacillating

2016 has so far proved to be a tumultuous year for the oil industry, resulting in its sharpest downturn in over 10 years. Industry revenue has dropped, an increasing number of oil rigs are facing closure and thousands of employees have lost their jobs. An oversupply of crude oil and diminishing consumer demand has led to fluctuating prices and an often volatile market. Wednesday’s price hike may offer a little relief to the current situation, but this upturn should not be taken for granted. Instead, the industry should reflect on the challenges encountered over the past few months, but this week’s failed Doha talks imply this is unlikely to happen.

Oversupplied and Undemanded

The biggest obstacle facing the oil industry is its overabundance of crude oil. The United States’ domestic production of oil has almost doubled in the past decade, while Canadian oil production and exports continue to grow annually. Iran re-emerged on the global market following the lifting of sanctions, and Indonesia rejoined the Organization of the Petroleum Exporting Countries (OPEC). Iraq and Russia continue to produce substantial amounts of oil, even though both countries are experiencing economic problems.

Offsetting this is a dwindling demand for oil in Europe and developing countries like China. A number of countries have seen their economies weaken over the past 12 months, negating the need for excessive importing. On top of this, growing consumer interest in renewable energy and energy efficient vehicles is reducing demand and changing public opinion on fossil fuels. People’s reliance on oil for energy is slumping, and this trend will only grow stronger over the coming years.   

Another contributor to the oil industry’s woes is the aforementioned OPEC, a cartel containing 13 of the world’s top oil producing countries. OPEC countries are responsible for 40% of the world’s total crude oil production, and the cartel has a strong influence on global production rates and market prices. Many oil producers called for OPEC to cut back its production rates in 2015, but the cartel refused to stabilize markets. The decision had an obvious negative effect on the industry, contributing to the current glut and forcing competitors out of the market. It seems that OPEC is only now deciding to address the problem, with reports suggesting a meeting may be held within the next few months to discuss halting production among member countries.

Deep Cuts

The above problems have had an unprecedented effect on the oil industry and how it operates. The US crude oil rig count reached a peak of 1,609 active rigs in October 2014, but stands at 351 for the week ending April 18 2016, the lowest US rig count since the 1940s. The US oil industry anticipates job cuts to reach around 118,000. The UK’s North Sea region saw the termination of 65,000 jobs in 2015, with a further 45,000 cuts expected for 2016, while Norway is preparing for the possible termination of 200,000 jobs. Most of the bigger oil producers including Chevron, BP and Royal Dutch Shell have made considerable payroll cuts to survive the downturn, and many of the smaller companies have declared bankruptcy.

The Second Glut?

The price gains made on Wednesday are a good sign, but there is still confusion as to how the industry should move forward. Talks were held last Sunday, April 17, among 18 oil producing countries including OPEC leader Saudi Arabia and top non-OPEC producer Russia. The talks, held in Doha, Qatar, focused on stabilizing oil output to January’s levels until October 2016, but the participants failed to reach an agreement

The talks failed due to Iran’s refusal to participate. In the days since, Iran, Saudi Arabia and Russia have all hinted at plans to abandon stabilization and instead increase production levels to counter the decline of US production. As these plans have not been established in unison, there is a strong possibility the producers will overestimate how much oil will be needed once the current glut ends, effectively placing the industry in the exact same position it’s now trying to escape. Unless oil producers are able to put aside their competitive differences and determine a collective future for oil production, the industry will remain very much at threat from its overenthusiasm to pump.

An Unpredictable Future

The global oil industry is an extremely complicated market subject to environmental, national and international challenges. The inability to effectively plan realistic consumption levels and a desire to outperform competitors has resulted in a global oil glut. Wednesday’s events may have returned optimism to the industry, but it will take a lot more than a 4% price hike to stabilize such a volatile and unpredictable market.  

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Published by Research and Markets