The oil market is in the early stages of a "sustainable but protracted recovery," according to oil and gas analysts at Jefferies International Limited.
The oil market is in the early stages of a “sustainable but protracted recovery,” according to oil and gas analysts at Jefferies International Limited.
“Supply/demand balances will transition to balance and then under-supply in the back half of 2016,” said Jefferies in a research note seen by Rigzone.
“Oil prices may not fully react to the fundamental under-supply until inventories draw to more normal levels in the late 2017/early 2018; at that point we believe $70 oil is fundamentally supported,” the company added.
Jefferies reported that the oil price has moved to a level that is within reach of the $61 per barrel “break-even for the sector,” which improves the “defensive qualities” of international oil companies as dividends can generally be viewed as safe in the near-term.
The global investment banking firm also revealed that major capital projects could be making a comeback in the oil and gas industry, after years of cost-cutting.
“Protecting the dividend through capex [capital expenditure] and opex [operating expenditure] reductions has been the major strategic re-positioning within the sector for the last two years, and it has been effective,” said Jefferies.
“With cost structures adapted to a lower oil price environment, the sector could be at an inflection point on sanctioning of major capital projects. In 2015, the industry sanctioned only six multi-billion dollar MCPs with an aggregate capital commitment of $49.4 billion. 2016 has already seen five upstream MCPs sanctioned with an estimated aggregated capital commitment of $59.8 billion including Chevron's $37 billion Tengiz expansion,” Jefferies added.
Chevron’s major expansion project at the Tengiz oil field in Kazakhstan will increase crude oil production at the site by about 260,000 barrels per day. The Future Growth and Wellhead Pressure Management Project (FGP-WPMP), will see $27.1 billion spent on facilities, with $3.5 billion allocated for wells and $6.2 billion for contingency and escalation operations.
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