Oil Heading Back In The Black After Years Of Decline

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Written By Mostafa Moradi

After years of decline the world oil market is at last showing signs of stability.

Oil companies have had to redefine their business models, axing thousands of jobs and mothballing drilling and exploration projects around the globe.

Meanwhile, the price per barrel tumbled from $102.83 a barrel in June 2011 to a low of $29.27 in January 2016.

Since then, prices have recovered to $51.24 a barrel, but at what cost to the industry?

The big oil companies have seen profits slump, while countries with oil and gas based economies, such as Saudi Arabia and the Gulf States, Iraq, Iran and Venezuela have all faced economic hard times as oil revenues dried up.

Pricing is rationalising

The industry is finally realising that the $100 a barrel model has disappeared and may never return and is learning to live with lower income.

That lower income has seen Shell, BP and other oil giants lose revenue and cut costs.

Those cuts have filtered down to losing thousands of jobs worldwide and oilfield services companies having to rethink their prices or go to the wall.

While the cost of drilling has fallen as technology improved, the decline has been more marked over the past two years.

“It appears that the pricing for drilling oil and gas wells has begun to rationalise,” said John LaForge, the head of real asset strategy at Wells Fargo Investment Institute.

“We do not believe that it foretells higher or lower oil prices in the next few months.

Out of whack

“It does, however, give us another piece of evidence that the oil markets have structurally begun to balance, after years of being out of whack.”

LaForge also explained that the oil sector seems to have entered a super cycle phase two as prices recalibrate after a crash.

The next tough time for the oil industry comes in a few weeks, when the OPEC deal to cut production comes up for a six-monthly review.

The original agreement was to put a lid on production for six months and to see output drop by 1.8 million a day.

Compliance with the deal has been patchy, although Russia claims around 94% of countries have done their best to stick to it – even though OPEC has sent a memo to all members urging 100% compliance.