The world’s over-supply of oil is like the deep slump in 1986. BP fears it may get worse as Iran’s supply hits market and US shale hold firm
The North Sea oil industry faces a drastic squeeze as the world’s crude glut worsens, BP has warned.
“We’re going to see massive restructuring,” Bob Dudley, chief executive, said. “The North Sea is a very high cost basin and it is going to be a painful adjustment.”
Mr Dudley told the IHS CERAweek forum in Houston, Texas, that the latest tax cuts in the Budget will help margins but do not go far enough to avert a bloodbath for smaller drillers and exploration companies.
The warning follows a study by the International Monetary Fund showing that the UK’s oil and gas industry has the highest cost structure of any major region in the world – if taxes are included – and is the most vulnerable to a prolonged downturn.
Mr Dudley said there is little chance of a revival in crude prices for a long time given the “remarkable resilience” of US shale producers, who have defied predictions of collapse and continue to drill record volumes.
The US rig count has plummeted from more than 1,600 in November to 734 this week, yet this has not led a cut in output due to rising efficiency and a shift in drilling tactics.
“It’ll level off, but for now we’ve quite a bit of surplus oil. There could be unintended consequences for the world in terms of stress,” Mr Dudley said, alluding to a possible wave of bankruptcies.
BP chief executive Bob Dudley
He added that a nuclear deal with Iran and the lifting of sanctions on the country could lead to a fresh surge of supply, perhaps more quickly than expected. “It will not take too long to have another 500,000 [barrels a day], and I don’t see Russian production coming off,” he said.
He compared the current dynamics in the global oil market to the glut in 1986, which took several years to clear. While big projects in the North Sea are still viable at today’s prices near $60, the area risks relentless decline.
Meanwhile, Mr Dudley also revealed that the Deepwater Horizon spill in the Gulf of Mexico five years ago had cost BP a total of $44bn (£29.5bn) so far in clean-up costs, legal settlements and provisions. “I don’t think any company has done more, so quickly, after an industrial accident,” he said.
Rivals are eyeing BP as a potential takeover target, calculating that the company may be too weak to defend itself as the energy sector faces a wave of mergers. But Mr Dudley said the group bolstered its defences before the oil price plummeted.
“We have been able to divest $40bn of assets. This has reduced risk and left us in a better position to weather the storm facing our industry. We are making some very tough decisions,” he said.
The company is seeking buyers for $2bn of US pipelines and storage terminals, according to Bloomberg.
Oil prices are heading higher and could soon return to $100 per barrel as war in the Middle East and speculators drive market
It wouldn’t be the first time that oil experts have got it spectacularly wrong when predicting the price of crude.
Goldman Sachs went against the prevailing mood in 2008 when it famously predicted that crude would hit $200 per barrel within months. Instead, oil crashed to levels around $40 per barrel as the global financial crisis punctured world demand.
This time around, the US investment bank decided to follow the consensus view on Wall Street when earlier this year it downgraded its short-term forecast for the price of a barrel to around $40 per barrel.
But instead of falling, oil has rallied strongly. Brent crude now trading above $63 per barrel is up 36pc since reaching its year low in early January. At this rate oil will be back at $100 per barrel by the end of the summer driving season in the US when middle-class America hits the great open roads to visit their ‘Aunt Agatha’ in Pennsylvania.
So why has the short-term outlook for oil changed overnight?
Lower prices have started to filter through to boosting growth in the world’s most advanced economies and with it demand for gasoline, which is once again on the rise.
Here are six reasons why oil is heading back to $100:
The market is tighter than you think: World demand for crude oil is beginning to rebound. After growth in consumption slowed last year the early signs are that demand is beginning to pick up led by developed markets that are responding to a period of lower prices. The Organisation of Petroleum Exporting Countries (Opec) expects demand for oil to grow by 1.17m barrels per day (bpd) in 2015 but this is a conservative estimate. Another 500,000 bpd of crude would erase the current 1.5m bpd surplus in the market. Remove this tight surplus and oil is back above $100 in a heartbeat.
Demand is picking up in US
War in the Middle East threatens supply: Gulf countries, which account for a fifth of the world’s oil supplies, are under siege. In Yemen, a shaky Saudi-led coalition is battling to turn the tide on Iranian-backed Houthi rebels with airstrikes. Abdel-Malik al-Houthi, leader of the rebels who are the brink of seizing Aden, is already being described by Iranian media as the “supreme leader of the Arabian peninsula. In the north, Islamic State continues to pose a threat to the Gulf in Iraq. The region, which controls most of the world’s oil is in turmoil and any further escalation in conflict could easily push crude back to $100 per barrel and beyond.
Gulf oil producers are under seige
Hedge funds are betting on oil: The vultures of global markets smell a killing and have started to turn bullish once again on oil heading back to $100. Investors have increased their net-long position on West Texas Intermediate (WTI) crude by more than 9pc in the first few weeks of April as the number of traders still betting on a further price collapse dwindles. Oil traders are beginning to turn bullish, which has already pumped up WTI by 36pc in the last six months.
US oil has rallied on $100 oil bets
China to unleash massive stimulus: The leaders of the world’s second-largest economy and biggest importer of crude have finally woken up to the dangers of a potentially catastrophic slowdown. The People’s Bank of China started the week by pushing more money into the system by cutting the amount of money that lenders must hold against reserves. Crude oil immediately responded. China will account for roughly two-thirds of Opec’s forecast increase in demand this year and a major push by Beijing to revive growth could easily push oil back above $100.
China’s oil demand may rebound
Barbarians at the gate: Royal Dutch Shell’s game-changing £47bn bid to buy BG Group is a good sign that ‘big oil’ sense that prices could once again be about to turn back towards $100. No one wants to catch a falling knife and Shell have obviously timed their move just at the point when crude prices have started to turn. More takeovers in the industry are expected with BP persistently linked as a target for Exxon Mobil. Such deals would also drag more free cash away from investment into drilling new oil wells and expanding capacity, which eventually can lead to demand outstripping supply.
Shell and Exxon may sense oil is about ti turn
America’s shale oil revolution is over: The number of rigs working in US oil fields has fallen for a record 19th straight week as drillers continue to cut back in response to the lower prices of the last six months. Although, US oil production if expected to reach a record 9.65m bpd average in 2015 this could represent the high watermark for the industry in North America. Shale oil needs prices above $100 per barrel to grow.