The oil market: in anticipation of seven years of fat

The oil market: in anticipation of seven years of fat


Analyst Alexander Frolov — about what will happen to the global oil and gas industry in the coming year

Photo: abcnews/

Departed 2016 was for the global oil and gas industry, if not the worst in history, since the oil crisis of 1973. People have been fired tens of thousands, the largest companies were losing billions of dollars, and small businesses ruined. Fever related industries and entire economies. Today, however, oil prices went up again, and the situation began to improve. Russian oil and gas experienced the hard times with dignity. Some companies were even able to grow in a falling market and demonstrate the increase in profits. But ahead of a new busy year. Wait for the return of the seven fat years yet.

The first question, of course, the price of oil. At the time of this writing has exceeded $57. Two years ago, the price seemed extremely low, and now is encouraging, although far from comfortable $80-85 per barrel. On this front, the greatest danger is posed by two factors: possible failure of the agreements on the reduction of production of black gold and a sharp rise in US production. Moreover outset that the risks that these factors present only in the current pricing system, which, in our profound conviction, requires a radical revision. She is hypersensitive vague expectations, vague anxieties and breaking news.

The breakdown of agreements on the reduction of oil production is unlikely to happen. If current trends in the market — that is, if the price will continue to recover and none of the players not involved in the transaction, did not show a sharp increase in production. The most attention of these players deserve the United States. It is considered that the American oil and gas industry is able to respond dynamically to changes and to quickly increase production. And the growth in oil prices will lead to revision of asset values and will open new opportunities for lending. However, if you look at the financial situation of most oil and gas companies in the United States, you will find a wild volume of debts, and the uncertain prospects for exit to return to existing projects, even with a further increase in energy prices. Therefore venture to suggest that oil production in the US will stop at the current levels, and possible changes will occur in the corridor of 100-200 thousand barrels per day. Otherwise, prices will again begin to decline, which again will hit primarily at the less equipped players.

Global demand for oil will grow. This fact, incidentally, makes the agreements reached on production cuts nice, but not required recovery of the market. Just without joint planning and strict adherence to agreements, the market risk to come to a shortage of energy. And the deficit, albeit short-term, does not need any sellers or buyers.

There is also the burning question of gas supplies. As you know, in the West it argued that “Russian gas supplies will soon be no need”, as in the United States and Australia entered in the system “powerful factories for the production of liquefied natural gas (LNG)”. According to this view, in fact, already in 2016 “ultra-cheap LNG to the us” was to begin to displace Gazprom’s supplies to the European market. And Australian gas will make it unnecessary to East gas transmission projects in Russia!

However, the reality is that, in 2016, the us LNG expansion is not specified. Yes, and the Australians faced with the exorbitant cost of LNG production, with an insufficient resource base. In other words, plants are not just expensive, but enormously expensive, while the Australian production of natural gas is not able to provide the inordinate ambitions of exporters. Contrary to the expectations of some — and, incidentally, a fairly significant part of the expert community, the Americans and the Australians in 2016 were able to market small volumes of LNG. Moreover, they had to sell gas below cost. The expected price war has not happened. However, such manufacturers may unleash a price war against companies that in the current environment, trading profit, and win it — remains a big question. Believe, and the upcoming 2017 will not give an answer. Rather, we will see attempts to revise the prisoners with the American manufacturers contracts, and the transfer and cancellation of some projects.

The zone of uncertainty for Russian gas in 2017 is not the competition with overseas suppliers, and in the field of litigation. Mutual claims of “Gazprom” and “Naftogaz” will begin to understand soon. The position of “Gazprom” is based on a valid contract, and the position of “Naftogaz” — the unwillingness to pay the bills. Which, by the way, he was not exposed to until the “Naftogaz” appealed to the court, wanting to get “some money” with “Gazprom”. “A little money” in this case is the amount approximately equal to the expenditure budget of Ukraine in 2017. Counter-claims of “Gazprom” for a few billion more.

The situation is such that even partial satisfaction of the Russian claim will be unaffordable for the Ukrainian economy, which “is rapidly blooming” the last three years in terms of the “losers of corruption” and “foreign investment”. While partial recognition would be the most likely outcome if the proceedings had been fully cleansed of politics. But in existing circumstances the court is likely to delay proceedings. Good possibilities for this.

In the famous dispute wins optimist of the pessimist, saying, I will not be worse. An optimist thinks that the worst is sure to be. So finally we mention the possibility of a wider conflict in the middle East. The war may spill over into the now prosperous oil-producing countries of the Arabian Peninsula. Then the market of black gold is not just waiting for growth, and a rapid, though very sad take off. In the current environment, this scenario can not be called absolutely incredible.

2017 happy new year!

The author is Deputy Director General of the national energy Institute

See also:

The Ministry of energy intends to reduce oil exports to Belarus

The Russian budget will be sustainable at an oil price of $40 per barrel

The opinion of the author may not coincide with the position of the editorial Board