Kemp: Macroeconomic Risks For The Oil Industry

Kemp: Macroeconomic Risks For The Oil Industry
The global oil industry now appears to be in the early stages of a cyclical expansion which is likely to see prices rise over the next few years, slowly at first but then accelerating later.

Reuters

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, Aug 4 (Reuters) - The global oil industry now appears to be in the early stages of a cyclical expansion which is likely to see prices rise over the next few years, slowly at first but then accelerating later.

Deep and long cycles in oil prices have been the defining characteristic of the industry since the 1860s ("Crude volatility: the history and the future of boom-bust oil prices", McNally, 2017).

The boom-bust cycle which started in late 1998, with prices briefly below $10 per barrel, and was only briefly interrupted by the recession of 2008/09, ended in January 2016, with prices briefly below $28.

In the 18 months since then, the industry has returned to an expansion phase, with a gradual increase in prices and drilling activity, much of it centred on the shale plays of North America.

Most of the industry’s cyclical indicators (production, consumption, stocks, investment, employment, prices, costs) point to a sustained upswing in activity that is likely to continue in the short and medium term.

Expansion Phase

Forecasting future movements in oil prices will always be subject to an enormous amount of uncertainty owing to the complex and non-linear dynamics of the oil market and all its sub-systems.

“We’ve never been any good at predicting these cycles, neither when they occur nor their duration. We don’t spend a lot of time even trying,” Rex Tillerson observed in 2016, when he was still chief executive of Exxon.

“How the future is going to look, we take no particular view on it, other than to recognise that whatever it is today it will be different some time in the future, and after that it will be different again.”

Price predictions have proved a regular graveyard for the reputations of even the most skilled oil analysts.

But with the oil industry just emerging from the deepest slump in a generation, cyclical positioning strongly suggests that prices are more likely to move higher rather than lower in the next few years (http://tmsnrt.rs/2fbrwM9).

The industry’s costs, which have always been pro-cyclical, are also likely to rise as the slack carried over from the downturn is absorbed and the supply chain tightens.

The main uncertainty centres on how far and how fast oil prices and the industry’s costs will rise in the years ahead.

Experience suggests the expansion is often slow and faltering at first and then accelerates as inherited slack is used up, memories of the downturn fade and confidence improves.


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