The sharp and prolonged drop in oil and gas prices has injected turbulence into energy markets as companies and investors alike try to figure out what the final outcome will be—and where opportunities or pitfalls may lie. In oil and gas, that’s been particularly tricky. Here are some of the factors affecting the sector.
In what seems like a counterintuitive move to many, OPEC is keeping production levels steady. Prices began falling last June when OPEC, in response to higher production through shale wells, did not cut production, but instead increased it to win market share through cheaper prices. Even now, Saudi Arabia has declined to be the only country to cut production to keep prices from falling even lower.
With Saudi Arabia the largest OPEC producer, it was expected to eventually knuckle under to falling prices and reduce production. However, OPEC produces 30% of the world’s oil and non-OPEC countries 70%. Saudi oil minister Ali al-Naimi was quoted in reports saying, “[E]verybody is supposed to participate if we want to improve prices.” And non-OPEC countries are not dialing back.
In fact, Russia could boost oil exports by as much as 5%, according to James Henderson, a senior research fellow at the Oxford Institute for Energy Studies. Henderson said in reports that because of reduced demand for refined oil products in Russia, thanks to sanctions and lower oil prices globally, its “teapot” refineries—small facilities that process crude into fuel oil—are cutting back. Falling oil prices make the Russian government reduce the discount teapot refineries receive to export. When that happens, refineries lower production—leaving more oil available for export.
If that happens, prices could be further depressed.
Then there are the oil companies, which are cutting costs—and jobs. Prices that have lost nearly 50% since June are forcing them to try to figure out ways to counter increasing exploration and drilling costs. Some companies are dialing back exploration or canceling planned projects, while others—notably several in the North Sea, such as Shell, BP and Chevron—are reducing personnel. Yet they’re wary of discouraging investment, lest they end up making a bad situation worse when (and if) prices increase.
In addition, companies are scrambling for storage, thinking to hold stocks until prices recover. As a result, not only are land-based storage facilities reaping profits, but companies have even been storing oil in tankers afloat and making plans to up their actions.
Thanks to “contango”—a phenomenon in which the price for future deliveries of a commodity are higher than the prices for that same commodity in the spot market—traders have been storing oil until many facilities are at or near full capacity. That’s been a boon for storage facilities, as well as a gamble that the price of oil will rise again.
The sudden upsurge of solar and other alternative energies has surprised many who thought low oil prices would hurt alternatives, but increasing pressure from environmental groups and increasingly alarming environmental studies have instead boosted the outcry against controversial extraction methods like fracking. Leave-it-in-the-ground advocates have also gotten louder.