Boom and Bust is Alive and Well

Energy Business Cycle 2(Published on LinkedIn Posts Jan 4, 2016)

Several lessons are emerging from the impact of low oil and gas prices encouraging market participants to adapt to the business cycle change, stay agile, and maintain operational visibility and control for what comes next in price movements.

What are the lessons?

  1. The cure for low prices is low prices. Lower prices provide the pressure to make decisions and take action—or else. Cuts in rig counts, deferred CAPEX and delaying projects mean impairments, write-downs, volatility and fear of future supply disruption. But action works to bring the market back into balance and eventually stabilize supply with demand.
  2. US shale producer productivity surprised everyone even in the face of falling rig counts. If Saudi Arabia thought it would drive US shale producers out of business it miscalculated. US oil production is now falling, but it has taken a lot longer and cost KSA a lot more to get to this point. US imports are creeping up as a short-term tradeoff against producing higher cost output.
  3. Deep cuts in CAPEX are creating a deep hole in reserves that threatens the ability of even the large players to meet future demand. This is classic boom and bust behavior alive and well in global markets. The worry is that the deferrals and cancellations will go too far and result in future supply disruptions if and when demand picks up faster than supply can recover.
  4. Saudi’s feel the pain of market share battles increasing competition inside OPEC and with non-OPEC producers. BRICS are in deep trouble with weak economic growth in China chilling global demand. Corruption problems plague many of the BRICS and other OPEC and non-OPEC producers. In a supply-short market customers may put up with corruption to get supply—but not in oversupplied markets as the crooked are learning.
  5. Technology is still US advantage and everyone wants it. We should see increases in M&A volume as weaker players are bought by stronger ones. Consolidation ‘sweats the fat out’ from over-extended players larded with debt. It also encourages investment in technologies to create advantage for the next boom in the market. Good deals and good technology attracts foreign buyers. It also raises cyber threats. Big changes also loom from IoT, machine learning, and cloud computing that are the next big things in advanced technology.

The bottom line is low prices are shifting market sentiment from worries about excess supply to worries of future shortage—classic boom and bust with contango. The longer prices stay this low the deeper the hole in future reserves and the more pressure market participants will face to get back to work or be ‘left behind’. The seeds of the next market boom are being planted now in the fears of being left behind in the current bust in oil and gas prices.

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