• A Window On Crude Oil Prices

    Driven by a massive and lingering imbalance ― excess of supply over demand ― global crude oil prices have fallen by more than 60% Spot Crude Oil Pricessince mid-2014 to multi-year lows, and the impact has been significant. Producing companies have deferred or even cancelled development projects worth billions of dollars and industry job losses are estimated to be about 200,000 with more expected. Once-bustling oil patch communities have become near-ghost towns. Corporate profits among the oil majors slumped as much as 64% year-on-year; some upstream companies have filed for bankruptcy and both banks and investors that are exposed to them have been impacted.

    Going forward, certain critical issues will likely define global oil prices.

    Fundamentals

    The International Energy Agency, IEA, recently reported a massive global crude oil inventory of about 3 billion barrels. Estimates of the current global crude oil imbalance range from 1.5 million barrels per day (MMbpd) to 3 MMbpd. According to the Organization of the Petroleum Exporting Countries, OPEC, that value is about 2 MMbpd. With increasing supply and a sluggish growth in demand, there is at present, no real indication that the widening imbalance will be reversed any time soon. Global crude oil prices therefore, baring incidental effects, will likely remain low in the near term. Continue reading  Post ID 436



  • Nigeria: The Challenge of Petroleum Resources Management (II)

    Nigeria boasts the largest economy on the African continent; her Gross Domestic Product, GDP, of US$573.652 billion in 2014, exceeded the next-largest, South Africa by more than 50%. With an output of about 2 million barrels per day (bpd), the country, a member of Organization of the Petroleum Exporting Countries, OPEC, also produced more crude oil than any African country in 2014. Nigeria has also been a destination for significant Foreign Direct Investment, FDI, particularly in the oil and gas sector. Oil majors Shell, ExxonMobil, Chevron, Total and Eni have invested billions of dollars in the country’s deep offshore projects. Gross Domestic Product 2014 - Top African CountriesPetroleum resources provide more than 80% of the country’s export revenue; however, the slump in crude oil prices from over US$100 per barrel mid-2014 to less than US$40 per barrel at present, has severely affected her foreign exchange earnings. The country’s reserves have fallen by more than a quarter from January 2014 levels. According to Reuters, the fall in reserves was due in the main, to sale of dollars by the central bank in order to defend her currency, the naira, which was pressurized by falling oil prices. Nigeria’s growth in real GDP has also fallen, in sympathy with global crude oil prices, as has FDI. In 2014 for example, FDI ― of which Nigeria's Foreign Exchange Reserves (2014 - 2015)the oil and gas sector takes a significant proportion ― fell by about 16% from the previous year, according to World Bank data, following slumping oil prices.

    The impact has been palpable. Many state and local governments are having great difficulty paying salaries and meeting other recurrent expenditure obligations with little left for embarking on capital projects. The country’s recent banking and currency restrictions were attributed to banks’ inability to meet foreign exchange obligations.

    Nigeria - Real GDP Growth (Y-on-Y) vs Oil Price (Brent)

    The country’s president last week presented a budget of 6.08 trillion naira (about US$31 billion) for 2016 to the National Assembly. The proposed budget boasts a record increase in non-oil revenue streams. However, some analysts have been quick to point out that the country’s reference crude oil price has already fallen ― even if briefly ― below budgetary provisions and that even some of the proposed “non-oil” revenue streams depend on oil for viability.

    With the current low oil price regime projected to endure, a strategic reassessment of the petroleum sector’s business model is imperative. Continue reading  Post ID 408



  • Seeking Investment Windows In The Current Oil Market

    The current global oil market holds different prospects for different sets of stakeholders. For oil producers as well as investors exposed to oil, there is the need for re-evaluation; and for consumers, it is the need to seize the day.

    The sustained slump in global crude oil prices has wreaked havoc on many oil producers as well as investors exposed to oil. North American tight oil producers accounted for the marginal increase in global supply, which led to the current overhang. Following the decision by the Organization of the Petroleum Exporting Countries, OPEC, led by Saudi Arabia, not to curtail output, U.S. (shale) operators as well as other higher-cost producers came under intense viability pressures. However, by idling more than half their drilling rigs, migrating to higher-yield zones and employing higher-efficiency methods, the shale operators were able to “buy some time”; but with oil prices falling below US$40/barrel and hedges expiring, those pressures have been renewed and the concern is that this time, the effect may be more disastrous.

    Exposure

    Energy stocks, particularly oil and gas, have taken a few hits over the last one year. More uncertainties associated with market fundamentals as well as climate and environmental issues may add to investment concerns. SP - Energy According to Bloomberg, more US oil and gas companies have filed for bankruptcy this quarter, than in any other since the great depression. In 2016, even more companies are expected to join that group. These Chapter 11 bankruptcy filings are meant to protect the companies from creditors while they restructure; but with oil prices projected to remain low in the near term, it is unlikely many ― if any ― of the companies will be resuscitated. Continue reading  Post ID 403