Big Oil Balanced Around $55/Bbl as Disinvestment Fears Wane

Whilst the OPEC and non-OPEC oil producers alike are cutting output in order to retain profitability, big oil multinationals are capitalizing on the higher prices, aiming to boost production in this and the following year, enjoying better market options than nations whose budgets are overly reliant on oil revenues.

Kristian Rouz – The OPEC oil deal, cuts in crude supply from other world's major oil producers, and the subsequent moderate rise in oil prices have provided relief to the industry majors as their returns on investment have moved into positive territory again.

For the first time since mid-2014, the concerns of disinvestment in oil exploration and extraction projects have eased, allowing the big oil producers to think about expansion once again. This, however, might result in a blow to the fragile stability in crude prices throughout this year, unless the major oil producing countries maintain their commitment to prevent the return of the oversupply, or the global economy gains momentum significantly.

Seven of the world's largest oil producing companies, including Exxon Mobil Corp. and Royal Dutch Shell, are eyeing an increase in oil output by 398,000 bpd this year, capitalizing on the higher crude prices and the newly-found profitability of oil extraction that stem from the OPEC oil cuts. At a price above $50/bbl, most privately-held oil producers remain in the black, including in terms of ROI (return on investment) in exploration and extraction at the current pace of global economic growth.

The following year, oil output from private companies could increase at an even quicker pace, according to estimates by the Oslo, Norway-based Rystad Energy AS.

"Few envision that Brent crude at sub-$50 a barrel is a viable price (in the first half of 2017, or H1) amid OPEC production cuts tightening up the market," Bjarne Schieldrop of Stockholm-based SEB Group said. If "last night's low of $53.58/bbl turns out to be the low point remains to be seen. However, we do think that buying in the territory between the current price of $53.88/bbl and down to $50/bbl is probably as good as it gets for buyers in H1."

This year could see a major increase in investment in privately-held oil companies as the pickup in industrial production and an acceleration in inflation in advanced economies might lift up the overall costs of energy. Subsequently, the optimistic sentiment of near-to-mid-term oil market profitability could benefit the oil producing nations, allowing them to abandon the current forced cuts in output.

"They could hit a sweet spot this year," Mark Tabrett of Bernstein in London said. "Heavy investments of previous years are paying off with more production, costs have been cut and the companies are in a position to take advantage of that when oil prices rise."

Oil prices had collapsed dramatically from above $100/bbl in mid-2014 to just $27.10 in January 2016, subsequently rising to the current $55/bbl due to the more optimistic assessment of the economic situation in major oil-consuming nations, and the oil output cuts in OPEC and non-OPEC oil producers.

The big oil multinationals are, however, only lightly bound by any obligations to contain their output as they operate across multiple national markets on both the supply and demand (including oil processing) sides.

Amongst these companies, production resilience has barely remained in the positive territory throughout the price collapse of 2014-2016, yet, the picture looks more encouraging when looking into the period of 2017-2018.

"For us, this will be about not starting to run too fast," Eldar Saetre, CEO at the Norwegian state-controlled giant Statoil said. "There won’t be a lot of new activity initiated when it comes to larger projects in 2017."

There is some skepticism over oil prices stability still lingering among market participants. The OPEC and non-OPEC output cuts are yet to be implemented, and the global economy might be nearing a phase of downturn after roughly eight years of extremely fragile expansion.

"I see this (rise in oil prices) as a dead cat bounce," Ole Hansen of the Copenhagen-based Saxo Bank. "Oil is unlikely to recover until the longs have been reduced."

These long contracts, most of which were concluded in December 2016 when oil optimism was at its highest, let buyer purchase large volumes of oil hoping for a stronger recovery in prices. Unless the prices gain further, these longs might be subject to a massive selloff, proving a major blow to the prices.

Meanwhile, Iraq is aiming to increase its oil exports from Basra to their record high in February, and North America is expanding its oil production. In the US, the oil rig count has been increasing for the past ten weeks, a sign that the balance in the oil market is still quite questionable. OPEC members, however, have no other option but effectively cut production as their breakevens are typically way higher than those of big oil multinationals due to a more diversified business structure and therefore advantageous position in the market of the energy majors.

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