Oil price fall could be measured in months says Douglas-WestwoodNews // November 3, 2014
Describing the recent steep fall in the oil price, Douglas Westwood said today: "We all need to remember, but often choose to forget, that oil is a highly cyclical sector. There have been seven significant price cycles since 1970 and also a few minor ones between times, so yet another should come as no surprise.
"The reasons for the fall in Brent crude prices from US$115.19 in June to below US$85 last week are well documented, as is the realisation that OPEC is now defending market share, rather than a minimum price. That said, the nature of the oil business is very different now compared to after the 2008 crash.
"It should be noted that 70 per cent of the additional producton that has come onstream since 2005 is unconventional. Much of this, of course, is from US shales - this is not cheap oil (mostly needing prices of US$60-80 to be commercially viable) and decline rates are rapid - without ongoing drilling the current production capacity will be quickly eroded.
"As in the past, the present downturn could be a great buying opportunity. In global E&P the NOCs rule and they will continue to invest; China has been the high spender and India's ONGC now plans a huge US$180 billion foreign production acquisition spree.
"Likewise in oilfield services - acquisition opportunities are likely to present themselves for strategic and PE buyers, as was the case in the last downturn. Even without oil demand growth, vast numbers of new wells will need drilling worldwide each year to counter natural decline rates, probably some 80,000 in 2014 and more as demand grows again, boosting the demand for oilfield services.
"Recent history suggests that oil price downturns tend to be short and measured in months, not years. There is plenty to suggest that, this time, it could be even shorter: rapid supply erosion is likely along with a healthy boost to GDP for net importers," said Douglas Westood. "Both high and low oil prices present opportunities for well-managed, well-financed companies that have a long-term view, as the oil and gas industry is not a short-term game. But the window of opportunity may well be very short before the next cycle begins."