Analysts Talk Oil and Gas Bust Cycle

Is the oil and gas market currently in a bust cycle?

That’s the question Rigzone asked James Davis, Director of Short-Term Global Oil Service and Head of Upstream Oil at FGE London, in an exclusive interview recently.

In response, Davis told Rigzone, “crude oil prices have fallen year on year, and as the supply surplus continues, as evidenced by reported stockbuilds, prices will fall further”.

“We’re already seeing evidence of oil companies cutting investment as a result of lower prices,” he added.

“If these are the qualities of what you want to call a bust cycle, then, we’re in a bust cycle,” he said.

In the interview, Davis highlighted to Rigzone that, for producers, $60 per barrel oil today doesn’t go as far as it did back in 2019.

“For the average tight oil producer, $60 per barrel today gives you very little free cash flow,” he said.

“However, in 2019, the average tight oil producer might have realized $10-15 per barrel of free cash flow at $60 per barrel,” he added.

“While operating expenditure and capital expenditure have crept up, it is weaker gas prices that have had the biggest impact on cost exposure,” Davis pointed out.

“Nonetheless operating margins are not as good at the current price deck as they would have been six years ago,” he noted.

When asked if this bust cycle is going to negatively affect future production, Davis told Rigzone that FGE is already seeing evidence that the low oil price environment is impacting oil output, particularly in the United States.

“While low cost producers (oil majors and international oil companies) have managed to grow output this year, the smaller, high cost producers have seen their output slump by around 200-300,000 barrels per day,” he said.

“We expect more declines from high cost producers over the course of the next 12 months, but unless WTI drops below $50 per barrel we expect production from oil majors and IOCs to remain firm,” he added.

Davis told Rigzone that oil that is developed on a longer time cycle is seeing little to no negative impact due to lower prices “as we’ve seen with the addition of new offshore instillations in Latin America, the USGC, and Africa; some of which have been brought online and ramped up sooner than anticipated”.

The FGE Director added, however, that the downcycle in crude prices will eventually impact long cycle oil, “which we expect to see evident towards the end of this decade”.

Davis went on to warn that, “while crude prices will remain volatile and prone to spikes and drops”, FGE sees crude “in a downcycle, or at least weak period, that could last another 5-10 years given the amount of production due to come online”.

When he was asked, in a separate exclusive interview, if the oil and gas market is currently in a bust cycle, Neil Crosby, Oil Analytics AVP at Sparta Commodities, told Rigzone, “we are not in a bust yet” but added that “there are early signs we are getting there”.

“We see the physical crude market much, much weaker than over the summer. Not only diffs, spreads, but also the way arbs are working,” he said.

“West of Suez (North Sea, WAF, WTI) is completely shut off from the East compared to late summer, because the Dubai market has tanked (rather as anticipated if you expect more OPEC production and exports, and with more Urals around due to the attacks on Russian refineries),” he added.

Crosby highlighted to Rigzone that “we haven’t seen oil pile up in onshore inventory yet” but noted that the market is very focused on how high exports and oil on water is just now. 

“At some point, if sustained, we’ll see onshore OECD inventory rise (and that is the major factor in terms of medium-term crude pricing),” he said.

“U.S.-China trade tensions came at a bad time in that respect and didn’t help flat price of oil … [last] week either,” he added.

Looking at how $60 per barrel oil today compares to $60 per barrel oil in previous years, Crosby told Rigzone that “the most important thing in terms of price vs production is shale break-evens”.

“We hear a lot that these are going down continually, partly on all the M&A activity. And U.S. production at record highs (and growth growing) partly reflects that this year,” he added.

Crosby went on to tell Rigzone that production “will for sure drop if price gets low enough”.

“It didn’t get low enough this year… yet,” he added.

“IEA [International Energy Agency] predicts a four million barrel per day glut in 2026; that really would be a crazy number and would mean very low price, where for example shale would react possibly rather quickly,” he said.

“But before we get a four million barrel per day glut, I would expect OPEC+ to make some hard decisions if they want to defend price at least a little bit,” he continued.

Crosby outlined to Rigzone that, if future production is affected by a bust cycle, the oil price could spring up down the line as a result. He pointed out, however, that “that process is probably a year or more in the making, once price gets low enough to impact for example shale supply”.

Crosby refused to speculate at this point where he thought the oil price could land in the future, outlining that it would depend on a number of factors.

To contact the author, email andreas.exarheas@rigzone.com