HP Editorial Comment: Take a moment and breathe
“Don’t panic” is probably the best advice for the downstream industry regarding oil prices. The upstream fully recognizes the present and short-term conditions for its business.
“Don’t panic” is probably the best advice for the downstream industry regarding oil prices. The upstream fully recognizes the present and short-term conditions for its business. It is an odd combination of excess supply supported by OPEC and moderated demand. There is no shortage of possible scenarios on future oil prices and another potential collapse of the global economy.
You have been here before
Veterans of the hydrocarbon processing industry are aware that the energy industry is moving through a pricing cycle. Unfortunately, there has not been much time since that last economic meltdown in 2008/2009. The past cycle began with an overheating of global financial markets and commodities, such as oil, were experiencing a high demand/tight supply situation. In 2008, we often said that $140/bbl of oil was too good to be true. And that was so correct. On the flip side, and oil price of $40/bbl is too low for the global economy.
Fig. 1 shows the highs and lows for Brent oil from the 2009—the lowest point in the last recession—through December 2014. Crude oil prices have swung widely in recent times. As such, the downstream must prepare for the best case (low feedstock prices and strong product demand) and the worst case (high feedstock prices and diminished product demand).
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Fig. 1. Monthly Brent crude oil
prices, 2009–2014. |
So, what is different?
The present cycle is a unique combination of cooling markets, excess supplies and Saudi Arabia’s hard-nosed position to take back market share for crude oil, condensate and refined product exports. In the early 1990s, Saudi Arabia held 18.9% of the global crude oil/refined product export market. Unfortunately, this nation’s market share fell to a low of 12.4% in 2014. Notably, this is the same market share in which OPEC again took a stance and flooded the international oil market, with the goal to take back market share in 1986. The mid-1980s were equally miserable for both the upstream and downstream, until corrections in supply and demand lifted oil pricing to an agreeable level for producers—mainly Saudi Arabia and OPEC.
Looking forward, many industry consultants are predicting a shake-out of upstream companies. The smaller, highly leveraged companies will be forced out due to uneconomical conditions. Those companies that have flexibility and a healthy balance sheet will weather this stormy part of the energy cycle. Some tightness in oil supplies should be anticipated in 2015–2016. (See “2015 outlook for oil price and its refining sector implications,” pg. 25). Efforts to lift prices by tightening supplies will create some shortages.
Balancing act
The too-fresh memory from 2009 is that, even with low gasoline and diesel prices, economic strife will not induce more energy consumption. At present, the main hope is that the global economy does not crack due to low pricing conditions. Unfortunately, some nations are already at risk. The EU has not fully recovered from the last decline and remains highly vulnerable. Japan’s economy slipped into recession following two quarters of economic decline in 2014. Also, Brazil fell into recession as investments evaporated in mid-2014 due to corruption and capital project overruns.
For the downstream, it is all about demand for refined products and transportation fuels. Fig. 2 shows that supply and demand curves will cross; however, the large gaps between supply and demand are quickly closed. Consider January 2014; as shown in Fig. 2, global production was exceeding demand. Brent was trading at over $100/bbl. By mid-2014, demand was closely matching supply, and oil prices began to decline.
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Fig. 2. World liquids fuels supply
and demand balance, 2009–2014. |
In 2015, the downstream industry will be intensely watching demand for refined products. Some regions, such as the Middle East, are in the middle of the commissioning and startup of mega-sized, export-oriented refineries. The new refineries will pull from the global oil supply and will be flooding the international market with refined products, with the intent to export to Asia and Europe. Unfortunately, the EU will struggle to recover and will see future rationalization of the refining and petrochemical industry.
Low oil prices and low economic growth will be a déjà vu moment. Although, the source for the low prices is entirely different from the previous cycle, the impact may be too familiar. Economic frugality is a possible solution to withstand the slow segments of the cycle. It is reasonable that the substantial new capacity underway for the downstream may be delayed. Continued observation on changes in GPD and refined products and petrochemicals demand is necessary while controlling expenses through 2015. The downstream will rebound, but the timing of the uptick is unknown. HP
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