Kemp: Macroeconomic Risks For The Oil Industry
Too Fast, Too Soon
The principal risk in the short term is that prices and drilling rise too far too quickly, overwhelming growth in consumption, and sending the industry back into a slump.
Something like this occurred in the first half of 2017, with private equity investors, shale producers and hedge funds all trying to anticipate a cyclical recovery and pushing drilling rates and oil prices too high.
The result has been an inevitable setback, with oil prices falling from their peak in February, rig counts apparently reaching a temporary plateau, and more cautious positioning from hedge fund managers.
The long-term cyclical recovery is likely to see more of these mini-cycles, as oil prices, capital investment, hedge fund positions and drilling expand unsustainably and then fall back.
The basic trajectory, however, should remain one of a long cyclical upswing over the next few years.
Business Cycle
The principal medium-term risk comes from the global economy, with the increasing probability of a recession in the advanced economies sometime before the end of the decade.
The current economic backdrop is exceptionally favourable for the oil industry, with a sustained expansion in business activity and a gradual acceleration in trade flows in most regions of the world.
But the major economies, like the oil industry, are subject to long and deep cycles in activity, which have an impact on oil demand and prices.
Unlike the oil industry cycle, which is in the early stages of expansion, the macroeconomic cycle in many of the advanced economies looks increasingly mature.
The U.S. economy has expanded for 98 months, since hitting a trough in June 2009, according to the National Bureau of Economic Research’s Business Cycle Dating Committee (http://tmsnrt.rs/2htEHZN).
The cyclical business expansion is already the third longest on record and will become the longest if the economy is still expanding in July 2019, surpassing the long boom of the 1990s.
There is a lively debate among economists about whether business cycles die of natural causes (because of accumulating imbalances in investment, inventories and financial markets) or are murdered by policymakers to control inflation or as a result of policymaking errors.
Moreover, the expansion phase of business cycles seems to have been getting longer, perhaps because businesses are getting better at managing investment plans and inventories, or because policymakers have a better understanding of how the economy works.
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