Continued addition to the global oil supply glut as well as the sluggish global economy will most likely militate against any sustained price rebound in the near term. A low oil price regime presents deal windows for debt-burdened companies as well as those seeking strategic repositioning and which windows investors may also avail themselves of.
The current crude oil price regime derives in the main, from market fundamentals: a weak global demand and a massive increase in supply. That increase in supply, over the past decade came from unconventional resources predominantly in the United States (shale) and Canada (oil sands); during that period, the petroleum group, Organization of the Petroleum Exporting Countries, OPEC, maintained output within a very narrow band.
The group’s decision late last year ― driven primarily by Saudi Arabia, Kuwait, Qatar and United Arab Emirates ― not to reduce output levels in spite of the massive supply overhang, spurred what was termed in the media, a “sheik-versus-shale” turf war.
If that decision was aimed at forcing production cutbacks among the higher-cost (unconventional) producers, then OPEC, with much lower production breakeven costs (US$10 – US$30 per barrel, US$/bbl) than United States (US$55/bbl – US$85/bbl) and Canadian (US$65/bbl – US$110/bbl) producers, has been able to do just that: of the seven key production regions in the United States for example, output for the month of March 2015 fell or remained unchanged in all but two, according to the Energy Information Administration. The rig count data as compiled by Baker Hughes is even more informative. The full rig report shows a 43% decline in U.S. rig count from the value for three months ago. Even the newly-employed operational efficiencies are not expected to countervail the effects of such steep decline rates. Production reports and rig counts are respectively, lagging and leading indicators of production trend, not withstanding imperfections in the latter. Continue reading