Price Rout Wipes $240Bln Off Oil Producers' Capital, Stirs Rebound Debate

As international oil prices have renewed their decline in early December, international consumers of oil are boosting their demand, capitalizing on low energy costs and thus contributing to a future rebound in oil prices.

Kristian Rouz – The recent week’s 10 percent plunge in crude prices has cost oil companies worldwide some $240 bln of capital, pushing governments from Washington to Beijing to consider measures boosting demand for energy. International oil supply has seemingly hit its ceiling, even though OPEC, the oil cartel, abandoned its output limits at the December 4 meeting.

Investors’ bearish stance on oil is mostly dictated by the insufficient demand for black gold, but as the US Congress moves to introduce tax breaks on refiners, and mainland China increases oil processing, the odds for the energy markets might eventually be improving, with this year’s Q4 potentially seeing prices bottomed out.

Oil exploring, producing, refining and transporting companies are currently worth some $3.72 trln combined, compared to $3.96 trln on 3 December. International oil giant Exxon Mobile alone lost $11 bln of value during the past week’s oil rout, while PetroChina shed $17 bln. Squeezing capitalization of oil companies is set to decrease the global crude supply due to an increasing disinvestment and decline in exploration and drilling.

Chevron’s 2016 budget was cut by 24 percent for 2016, while Conoco announced they would decrease capital expenditures by 25 percent into the next year to $7.7 bln. The world oil industry is expected to shrink by $200 bln in 2016, meaning personnel cuts and an across-the-board idling of oil derricks, according to data by Eni.

While  OPEC has all but fallen apart, having lost its decisive says in forming of oil prices, the almost inevitable wave of defaults in the US shale oil small caps is creating a solid foundation for a rebound in oil prices. However, if global demand for oil does not improve, supply cuts alone will be utterly insufficient to boost oil prices. For now, the best thing for big oil is at least a stabilization in prices, which may actually be already here.

"It is clear to us that technically speaking we may not be that far away from a true bottom," Jan Stuart of CreditSuisse said.

At this point, the long-term oil price, determined by oil futures, is largely speculative, based on the negative fundamental factors plus a premium of bearish sentiment widely common in the markets. Brent futures are now at their 2005 levels, but the actual spot price of Brent is only slightly higher, rendering ‘storage trading’, capitalizing on the difference between futures and spot prices, is not as profitable as it was in the wake of the 2008 crisis. That said, oil speculation is set to evaporate soon.

"We also have been saying that the fourth quarter of this year would be perilous and expressed concern that new lows might be hit," Stuart noted. "It is just that we are not in the 'lower-forever-more' camp."

According to CreditSuisse, the average price for oil in 2016 would be around $60/bbl based on fundamentals only, excluding possible events spurring major fluctuations in oil price. Even though the US and China have both accumulated significant crude inventories, contributing the lion’s share to the lingering oversupply, the negative effects of that will expire by mid-2016 due to the rising demand and staggering, if not falling, supply.

The global demand for oil is driven by the recent economic improvement in the Eurozone, Japan and India. But there are two major factors, also driving demand for oil: the US and mainland China’s oil refining is picking up momentum.

In the US, Congress is considering tax breaks for refiners in order to make up for their loss in competitiveness should the US commence full-blown export of crude for the first time since the early 1970s. As suggested by Sen. Tom Carper (D-DE), independent US refiners should be entitled to a $3/bbl tax credit in case the US starts exporting oil.

US oil producers like Conoco and Continental Resources have long been lobbying for the oil exports ban to be lifted, and that, coupled with refining tax breaks, would boost both US oil prices and big oil capitalization. Meanwhile, as US oil is hardly cheaper than international crude, any negative impact on prices may be safely ruled out.

Mainland China’s oil refining hit record highs as crude is cheap, while the demand for petroleum products in the 1.4 bln nation is immense even despite the economic slowdown. The mainland’s refining rose an annualized 3.3 percent, up to 10.73 mln bpd, according to data by National Bureau of Statistics. China’s net fuel exports rose 77 percent from October, to 2.22 mln tons.

This is good news for refiners, as long as they can find an export market large enough. China’s oil processing is expected to rise further as the government in Beijing will support any positive developments in the economy in order to support GDP growth at a pace above 7 percent year-on-year.

While China’s oil output is falling, some 0.5 percent in November from a year earlier, China Petroleum and Chemical Corp., along with SinoChem Group, comprising some 80 percent of the mainland's oil processing, might eventually provide some major demand for US exporters should the oil export ban be lifted in Washington.

This, in turn, will drive the global oil price.