The end of cheap oil: Have prices troughed?

Since October last year, 58 per cent of US oil and natural gas rigs have gone offline (Source: Getty)
Having fallen by more than 50 per cent since last summer to under $50 per barrel, Opec has said that it expects oil prices to rise to $80 per barrel by the end of the decade.
The oil cartel, which decides on the collective production policy of countries like Saudi Arabia and the Gulf states, believes the sustained price rout has caused oil production elsewhere to fall, particularly in the US.
The group has revised down its estimates for the quantity of oil it expects its competitors to produce in 2017, to 58.2m barrels a day – 1m fewer than previously thought. So, has oil bottomed out?
Having committed to its production targets, Opec is succesfully starving other producers, with higher break-even prices, out of the market. Asset diversification has helped countries like Saudi Arabia to weather the storm.
Indeed, the Saudi government has been blowing $10bn in forex holdings every month to sustain it. But oil-dependent rivals like Russia and Venezuela are in recession, and the landscape of the US energy industry is bleak.
Since October last year, the supply glut has caused around 58 per cent of oil and gas rigs in the United States to go offline, according to oilfield services company Baker Hughes.
Having suggested that the price risked collapsing to $20 per barrel less than a fortnight ago, Goldman Sachs anticipates that oil production in the US may fall by more than 250,000 barrels per day between the second and fourth quarters of 2015.
US oil and natural gas projects worth $1.5 trillion look to be at risk, according to a report yesterday by Wood Mackenzie.
Opec’s $80 per barrel projection may be optimistic, and experts have been loathe to predict when the price will pick up exactly. Capital Economics estimates that prices will reach $70 per barrel by 2020, and its commodities economist Thomas Pugh reckons that the impact on the US shale industry will be lasting.
“By 2025, the core shale industry will be considerably smaller than it is today, focusing on niche areas where a profit can still be made. Opec will always be producing because they are the lowest cost producers in the world. The higher cost stuff will come online to meet demand as and when it’s needed.”
Sentiment in markets has begun to turn bullish, with prices on US crude rallying during yesterday’s session, and net-long positions in West Texas Intermediate Crude Oil rising to two-month highs last week.
For oil companies, the blow from cheap oil has been somewhat softened. “Creditors and other interested parties have taken a more accommodative stance to restructurings than perhaps might have been expected, and volumes of distressed mergers and acquisitions (M&A) have not materialised,” says Ben Higson, partner at Hogan Lovells.
Signs of rising prices are encouraging for the industry.
“We have seen some upward movement in instructions for oil and gas M&A into the fourth quarter,” says Higson. “And there are tentative expectations that this could continue if oil prices rise.”

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