Oil Prices, Recession, Geopolitics, and Opportunities

Oil Prices, Recession, Geopolitics, and Opportunities

Learning from the Great Recession

What can we learn from the Great Recession from Dec 2007 to June 2009?

Prior to the Great Recession, in 2005-2006, oil prices were around $60/Bbl.  The oil & gas industry can sustain itself at $60/Bbl price, but it makes profits difficult to attain, especially in the US onshore sector.  Oil and gas operators and service companies were submitted to financial discipline by investors wanting to see higher returns. For these companies, capital became tight.  Wall Street uses oil operators’ forecast data to predict more supply than demand, so oil prices remain stubbornly low. During these times of low oil prices and financial discipline, companies borrow to sustain their activities, betting on an “imminent rebound” of oil prices. In order to increase their borrowing capacity, operators need to make their assets, ie oil reserves, look as good as possible. Before the Great Recession, low oil prices lasted too long. The number of service companies, and operators that filed Chapter 11 increased drastically.

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The Oil Industry Today

Fast forward to a few years before today, in 2015-2016, oil prices were around $45/Bbl. Activities were slowing, and rig counts were declining. Despite that, operators were bringing technological improvements, and kept increasing wells’ productivity and resources’ recoveries. These technological improvements were great but were also primarily funded through borrowing capital.

If we jump to today, a recent article from the Wall Street Journal reports a steady increase of bankruptcies in the oil sector: The Wall Street Journal cited, “180 service companies have filed for bankruptcy since 2015.” It also noted that, “Shale companies have managed to maintain and even increase production by eking out efficiency gains, although they face tremendous pressure as capital dries up from Wall Street.” Wall Street is still using operators’ reserves forecasts to predict more oil supply than demand.  If you add in fears of a new recession, you may be able to explain continued low oil prices. As of Sept 2019, the Energy Information Administration (EIA) reports a 6.9 million-barrel weekly fall in US crude supplies – see MarketWatch article. Are we in a  similar cycle to that of the years prior and during the Great Recession?

Geopolitical Influences to this Cycle

The cycle from 2015 to today may seem very similar to the 2005-2009 cycle, but geopolitical events will also increase or exacerbate oil prices greatly. The first geopolitical event is Saudi Arabia taking public 1% of Saudi Aramco, its national oil company. The IPO is scheduled in tranches over time. Saudi Arabia needs oil prices around $80/Bbl to obtain the $2 trillion valuation sought for Saudi Aramco. Hence why the Saudi Crown Prince fired the oil ministry, and announced collaboration with OPEC and non-OPEC members to cut production and increase oil prices.

The second geopolitical event is the strike on Saudi oil facilities that, according to the US and Saudi governments, comes from Iran. The cycle of low oil prices doesn’t just put financial pressure on oil companies but also on entire countries. It increases tensions in the Middle East that we have seen in the past leading to large conflicts, and war. No-one wishes this, it would be a very sad situation for the Middle East region, which could greatly impact the oil prices.

Investment Opportunities

Given this information about repeatable and predictable cycles in oil prices , as an investor, one may perceive this as a great time to invest in oil & gas assets. Check out all the properties for lease and for sale on PetroValues.com, the oil & gas marketplace.

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Yoann_Hispa
Written by Yoann Hispa, CEO of PetroValues

 

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