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Latin American crude exporting and product importing countries are all shouting the same thing: "We have no money! We have to cut costs!" Over the last few years, crude exporting countries such as Brazil, Mexico, Colombia, Peru, and Ecuador have seen revenues fall dramatically.
Meanwhile, despite lower energy prices, trade deficits have worsened as costs have continued to rise for steadily increasing quantities of oil product imports.

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Last week the US Energy Information Administration (EIA) released its latest Short Term Energy and Summer Fuels Outlook, which shows 2016 gasoline demand growing 130,000 bpd after having grown by a massive 240,000 bpd in 2015. Driven by a spike in new car sales, especially SUVs, and very low pump prices (which have fallen by more than a dollar per gallon in the past year), US consumers have boosted their demand for gasoline to record levels, finally erasing the steep drop that occurred in the aftermath of the global financial crisis which started in 2007. This is part of a broader trend that saw global gasoline demand rise by more than 700,000 bpd in 2015. 

Gasoline demand growth is only half the story in the US. We are also watching the evolution of demand for premium gasoline, which has expanded sharply since oil prices started to drop in mid-2014. Our sense is that American drivers feel more able to splash out on premium gasoline when the pump price is as low as it has been in recent months. Some new cars also require premium grades of gasoline. Tracking US consumption and price data, we can see that this strength has translated into a premium for octane barrels in the US, as refiners adjust their operations in response to rising demand. Globally, gasoline prices are very strong at present, reversing a long-term trend that has seen diesel premiums exceed those of gasoline for more than a decade.

Refiners globally have been scrambling to respond to this gasoline flip-flop. You can read our latest White Paper on the subject here.

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With oil prices dropping below $30/bbl, the depth and duration of the current low price environment is taking a major toll on OPEC members.  Despite adjusting their budgets and cutting popular benefits like fuel subsidies, member states are running significant deficits, and the lack of cash flow is starting to drag their economies into recession.

Low Prices Should Drive NOC Innovation

Whilst this may look like a financial ‘own goal' to some, it also represents a huge opportunity for OPEC national oil companies (NOCs) - and others - to recast themselves on more commercial lines.  Using this opportunity to trim costs, to integrate and to streamline operations will leave these companies far more competitive and 'match fit' once prices do resume a more sustainable trajectory.  This will benefit not only the NOCs but also their biggest shareholders – the national governments.

News that Saudi Aramco is looking at a possible IPO certainly got the attention of the markets.  Floating a stake in arguably the world’s biggest company would be a huge move and could release a massive amount of cash to the Saudi government.  But before Aramco could be floated – especially on major stock markets – it would require a lot of sunlight on the company’s operations.  Saudi Arabia has traditionally been quite secretive about the performance of Aramco, which is not only responsible for most of the state’s income, but also sustains the House of Saud, which is large, diverse and said to be talking about its future direction, its leaders and their plans for reform.

Our goal here isn’t to dissect the politics of the Kingdom or to speculate on the possibility of such an IPO, but rather to note the real potential of re-aligning OPEC NOCs along more conventional and transparent business lines.  Transforming NOCs into market-focused entities will not be easy.  It means setting aside the politics, bureaucracy, patronage networks and “business as usual” mentality that frames many such companies.  Realising the real value of NOCs requires their costs to be controlled, supply and investment decisions taken with reference to market rates of return and their workforces structured and upskilled for the challenges of tomorrow.  Just getting in shape for an IPO would provide new direction and vigour for the NOCs, with clarity on social, financial and environmental objectives – the so-called “triple bottom line” that are the real benefits NOCs bring to their stakeholder governments and populations.  

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In this White Paper:

  • Since the beginning of 2016, oil prices have slipped another 15 percent to their lowest level for more than 12 years.
  • Production continues to be resilient, though as Stein’s Law suggests, if a trend cannot continue, it won’t.
  • The new environment of “even lower for even longer” will have diverse consequences for different sectors of the oil and gas industry.
  • We look at the prospects for each sector and consider the key questions they need to be addressing today to ensure their viability in the medium term.


"Earlier this month, oil prices slipped to their lowest level for more than 12 years. Despite this drop, output from both OPEC and non-OPEC producers remains surprisingly resilient. With supply outpacing demand by more than 1 million bpd, options for outlets are becoming limited and the “end game” for oversupply is expected to start soon, as prices plunge further, forcing some producers to shut in production. As prices slip below sustainable levels for many producers, we explore the implications for the different sectors of the oil and gas industries..."

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Oil prices have started 2016 with a deep dive, with front month Brent crude oil losing around $4/bbl this week, or around 10 percent of its value, despite rising political tensions between Iran and Saudi Arabia.  At the time of writing, the price of Brent is just over $34/bbl, a level last seen in 2004.  Clearly the market is focused more on the sustained level of oversupply and fears of an economic slowdown spurred by the Chinese stock market meltdown than on sparks flying between the two OPEC powerhouses. With global stock levels rising by over 500 million barrels last year and continuing to rise despite unsustainably low current prices, crude oil traders are nervous and short positions have increased to recent record levels, pointing to lower price expectations in the months ahead.

that sinking feeling 2

Much attention has been focused on the US shale oil sector, which has been defying predictions of collapse for more than a year now.  While output has slipped in recent months, supply is still abundant, production in some quarters is still rising and oil continues to move to markets in the US Midcontinent – at least for now.  A successful stock market placement by Pioneer Natural Resources this week, raising $1.4 billion dollars to sustain an expansive capital investment programme and boost output, is a vote of confidence in the sector despite lingering concerns for the viability of some smaller players.  A key question remains as to whether US tight oil producers will have a soft landing, with production slipping only modestly, or a much harder time with output perhaps falling by another 1 million bpd.  On current evidence, the former seems more likely, which is a challenge to producers elsewhere.

The current price environment is bad news for the oil majors, who have already hacked away at their capital spending programmes with a view to sustaining dividend payments and turning net cash positive by 2017.  The biggest impact here will be on longer-term growth of conventional production, and potentially on the oilfield service companies hired to develop new resources.  If 2015 was tough, 2016 will be tougher, with an even sharper focus on cost control.  A test of oil prices in the $30/bbl range will drive producers to stress test their new projects at hurdle prices far lower than in the recent past. Having squeezed costs over the past two years, non-OPEC upstream will become much more cost competitive, which heralds an extended era of sustained lower marginal cost crude oil. 

Meanwhile, refiners continue to benefit from cheaper energy and strong consumer demand, especially for gasoline.  The mild winter in the Eastern US and parts of Northwest Europe has weakened demand for distillates, which are accumulating in storage in Europe, but strong gasoline cracks are driving refiners to sustain output and delay maintenance with a view to “getting while the getting’s good”.  This is a key opportunity for refiners to invest in operational efficiencies to be better prepared to weather then next downturn when it comes.  Margins remain stronger today than before the oil price crashed, though refiners will be wary of an economic slowdown which would curb demand growth for refined products. 

KBC Energy Economics sees oil demand growing by 1.5 million bpd in 2016 and 1.9 million bpd in 2017, but these figures are dependent on sustained economic recovery in Europe and growth resuming throughout North America, Asia and the Middle East.  Growing demand should serve to tighten up the oil market by late 2016, with price recovery following on.  KBC sees prices remaining in the low $30/bbl range in Q1 before rising through the rest of the year to finish around $57/bbl at year end.  Refining margins are likely to remain robust at least through the ‘driving season’ in the Northern Hemisphere summer. 

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"OPEC’s lack of action at its meeting on December 4th signals a crude oil market that will remain oversupplied for considerably longer than was earlier expected. By continuing to push output far above its former production target of 30 million bpd, and by implicitly acknowledging that this will go higher still with the return of Iranian barrels, the exporters’ club have shown their hand – they are intent on winning the market share battle, and will continue to push prices down until the market rebalances and more expensive marginal oil is shut in. 2016 is shaping up to be a challenging year in the oil patch.

Some see this as an existential struggle between OPEC and US shale oil producers, though not all shale oil is high cost, while some OPEC production and much new non-OPEC exploration and production would not be economic at today’s price level. Low prices have spurred innovation in US shale production, which could have the impact of making far more shale oil production viable in the medium term, though signs are at present that output is slowing quite steeply in response to prices for benchmark WTI crude below $45/bbl.

The implications of “lower for longer” are widespread and are having an impact across the entire oil sector – upstream, midstream, downstream and for petrochemicals, as well as some collateral impact on gas producers. Firm action to lower costs and drive efficiency gains is required throughout the industry. These are at the heart of an Operational Excellence (OpX) programme designed to make any organisation more resilient against tough market conditions..."

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In this White Paper:

  • OPEC's continued inaction suggests a longer duration for lower oil prices
  • The market is still a year away from balance, implying a challenging 2016 that requires robust responses
  • Oil producers must cut costs to stay competitive today and maintain tomorrow's supply
  • Refiners need operational flexibility to respond to changes in product demand


"The official communique from the latest OPEC meeting in Vienna on 4 December 2015 suggests an organization prepared to sit back and watch what happens as a result of Iran’s anticipated return to market in early 2016. But it is what is not written in the communique that matters most to participants in physical oil markets – any evidence of compromise or concern with the present state of affairs.

OPEC is a consensus organization. It takes no action without unanimous agreement of the twelve (now 13) members. The lack of any change at the December meeting does not, however, imply concord or satisfaction among the member states. Rather, it implies a lack of unanimity to any course other than status quo ante. This despite the very public and vocal criticisms of the current “anything goes” approach that preceded this latest meeting from a number of quarters, including Venezuela, Ecuador and Algeria. Some members clearly want a production cut, but they are not willing or able to cut alone – the actions of any smaller members would have an outsize impact on the cash flow and national budgets of these states, many of whom are almost wholly dependent on oil for export earnings..."

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