Brent Oil, the global benchmark price for oil purchases, is on the up again following its six-year low. However, experts warn it is premature to talk of recovery. Here we take a broad look at the impact of the price dip on supply, companies’ profits and exploration.
Over-supply, combined with the sluggish economy which slowed demand worldwide, pushed oil prices down. Meanwhile the USA, thanks to its shale oil industry, was importing much less, leaving considerable ‘spare’ reserves. OPEC countries, notably Saudi Arabia, calculated that keeping oil wells flowing would put pressure on companies in non-OPEC countries (including the USA) which have to contend with much higher extraction costs. These vulnerable companies cut investment – which in time will lead to a reduction in supply.
Overall, analysts believe supply has not been too drastically affected. Rather than suspending operations, companies will often continue producing oil at a loss. In the North Sea, where many fields are nearing the end of their lives anyway, decommissioning is expensive: it is considered better to simply keep going.
Although by early March the Brent crude oil price was approaching $60 per barrel, back in January it sank below $50. When prices are this low, the first to feel the pain are the older US onshore wells. Almost as vulnerable is North Sea production, where the difficulty of extraction is driving up costs. BP and Shell are among the companies which have cut UK jobs in recent months in the face of a slowdown.
US fracking companies had borrowed heavily, believing that prices would remain high. Oil prices are determined by predictions as much as by supply and demand: if producers guess that prices will remain high, they invest. By the time their investment bears fruit in the form of increased supply, prices or demand may already have dipped – as they did this time.
Among the casualties were two Houston-based oil companies: in the space of 48 hours in early March both filed for bankruptcy protection. However, big companies appear to be more resilient than the smaller, less profitable drillers such as Dune Energy, one of the near-bankrupt duo, and are helped along by still-plentiful finance and falling equipment costs.
Many companies are putting new exploration on hold and focussing instead on projects that offer more immediate returns.
A good example is Mexico’s state-run oil company. While some deep-water exploration projects have been postponed, it has invited tenders for shallow-water projects. Extracting oil from these deposits costs only around $20 per barrel, so Brent prices would have to drop very low before these schemes become unviable.
Finally, companies are also taking a cautious approach to ‘unconventional’ oil and gas. This category includes shale oil and shale gas which, as we saw in our last news/blog posting, is difficult and therefore expensive to extract.
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