Low oil prices may be the rule for quite a while — you need to make the best of it.
It’s certainly not news to anyone in this industry that the global oil markets are in a state of turmoil, with the price of a barrel of crude having lost almost half its value in the last 10 months. And while no one knows if we have seen the bottom yet, as of mid-June 2015, US (WTI) prices have stabilized around the mid to high $50’s/bbl for now, which is an improvement over its low of $47/bbl in February of this year. While it’s easy to look back at prices, it’s certainly more difficult to predict what will come in the future.
Most experts agree the primary cause of the collapse in prices has been weak demand growth in Europe and the Asia Pacific region due to slowing economic growth coupled with strong production growth, especially from US shale producers. (Read more about the changing US markets in "The Need for ETRM Software in US Energy Markets.") Exacerbating this balance has been the strength of the dollar which has driven down the value of dollar denominated crude contracts.
Given the confluence of situations that has led us to where we are now, the complex interplay of these events makes it difficult for even the savviest prognosticator to know when we will see any sustained recovery in prices.
It's Tough All Over
Global economic growth continues to be sluggish – Europe’s financial performance remains weak and China’s growth has slowed from double digits just a couple of years ago, and now looks to fall to 6-7% for the foreseeable future. Based upon most experts’ forecasts, there is little hope of seeing significant growth in global oil demand for at least the next 12 to 18 months.
In the US, drilling has slowed by almost 50%, and while US production numbers showed some short-term declines in the aftermath of the collapse, production is again increasing as wells that were drilled but not completed are now being brought on-line. In the latest numbers reported by the US Energy Information Administration (EIA), US production reached 9.6 million barrels a day, a more than 30 year high. It is expected that additional production from drilled but not yet completed wells will help sustain production, though some regional declines will undoubtedly occur, particularly in the highest cost environments such as the Bakken Shale region in North Dakota. Outside the US, key OPEC producers, in particular Saudi Arabia, have been unwilling to curtail production in support of higher prices.
Adapt Your Business to Today's Reality
Given that the conditions that created this uncertainty are expected to continue for the foreseeable future, there is little choice for market participants – you must adapt your business to the reality of a sustained period of lower prices and higher volatility.
While producers will struggle with lower prices, oil and products traders will certainly benefit. With lower prices come lower capital requirements; and with increased volatility, traders can certainly see the potential for profit that they’ve not seen in years. We’ve already seen these effects in earnings statements from companies such as BP, Total, and Shell, whose trading profits greatly increased even as the value of their equity production declined. Many non-producer trading companies, such as Trafigura, have similarly reported record earnings from their oil trading groups.
The Rewards are There for the Taking
Volatile markets reward risk takers, but only those that make sound decisions based on the best market data, information, and insights; all backed by the best trading systems that can capture, analyze, and present this requisite information to their traders in a clear and concise manner. Using systems such as Eka's InSight CM platform for energy products provides traders the right information, exactly when they need it.
For the aforementioned producers, the natural reaction to low prices is to cut spending. Many producers have slashed drilling programs (as reflected in falling rig counts) and reduced field and administrative staffs. While clearly right-sizing the organization in reaction to reduced activity is the smart decision, it may also be worthwhile for companies to consider the operational and financial advantages to be gained with next-generation ETRM software systems that can reduce costs and maximize the value of production.
Gain a Competitive Advantage with Next-Gen ETRM Software
Given the boom conditions these producers enjoyed over the last several years, many viewed ETRM software as simply a record keeping system, one whose sole function was to keep track of the value of rapidly increasing production. Unfortunately, in their rush to keep up with operations, these companies may not have taken the time to properly configure those systems to capture the component costs of gathering, processing, and transporting all that new oil and associated gas production. Similarly, given the rapid pace of drilling and new well hook-ups, most didn’t have the luxury of time to spend maximizing the value of sales contracts – they were just trying to get the production flowing to market.
The good news for these producers is that it is never too late to reap the rewards of a next-gen ETRM software solution.
If your ETRM software hasn’t been designed to capture the cost and revenue components that are necessary to truly optimize your oil and gas production and marketing operations, including providing contract level P&L, it may be time to upgrade to a solution that can. If that’s the case, we can help.
