Oil Demand And Movement Of Oil Prices

Last few blog posts would have given readers a good idea about oil supply. How through development of shale oil production has been able to keep pace with consumption. And despite geopolitical instability in Middle East oil prices have been relatively stable through the past one year.

Now let’s have a look at the demand or consumption side of oil. Oil consumption is very closely related to the economic activity or GDP of the world as a whole. Looking at the figure below you can quickly make a rough estimate of the growth in oil consumption.

 

Most of the GDP growth for past decade or two has come mostly from Asia. These Asian countries have also become big consumers of oil. So if you want to make any bets on the future of oil prices, GDP growth prospects of these big Asian economies should definitely come under consideration. The figure below points to the exact numbers. Europe consumption has fallen while Asia’s increase has by far been the biggest.

 

So next time you see GDP growth in China or India faltering, expect oil prices to go down and vice-verse.

Offshore Drilling vs Shale Oil

Here are two very good articles in Financial Times about how on one hand shale oil production is booming in the US and on the other hand offshore drillers are headed for even tougher times. The links between these two industries are beginning to get clearer by the day. For now it seems safe to say that shale oil is definitely imposing a lot of pain on offshore drilling companies.

Fred Olsen: all at sea

http://www.ft.com/intl/cms/s/3/e1502936-0907-11e4-8d27-00144feab7de.html#axzz37bBMFNAe

Energy: The indispensable country

http://www.ft.com/intl/cms/s/0/601a8476-0b5d-11e4-ae6b-00144feabdc0.html#axzz37bBMFNAe

Both these articles above contain lots of good information and are very much in line with what was published in this blog before.

Where Are The Stocks For Offshore Drillers Headed?

Shale Oil Imposing Pain On Offshore Drilling Industry

Bottom Line: Be ready for more pain in the coming months for offshore drillers and keep a close eye on those earnings report.

Is Weakness In Offshore Drilling Industry Starting To Have An Effect?

Weakness in the offshore drilling industry and oversupply of rigs is not a hypothesis anymore. Industry is well aware of the challenges and most of the companies are getting ready for this upcoming rough phase. Offshore rigs count for the month of June has shown another decline in terms of number and usage for jackups and semisubs, continuing the trend for past one year. Drillships on the other hand has been able to hold up due to continuing increase in ultra deepwater activities around the world. See graph below.

 

Although the decline is slow and gradual, this will likely have an effect on day rates for rigs in the near future. And with upcoming new deliveries the situation can turn even more dire.

Where Are The Stocks For Offshore Drillers Headed?

Many people believe that oil price is a major indication of the offshore drilling industry prospects. However if events of this year are taken into account things look very different.

Let’s first have a quick look at oil price (Brent Crude) which has risen slowly and steadily by about 3.3% this year to current state of $109. On the other hand stocks of offshore drillers have been trading well below that mark. See graph below for comparison between stock prices of Seadrill, Ensco, Noble and Transocean.

 

 

Only recent political instability in Iraq has brought some respite and gains. But as oil production from other parts and sources increase, oil price will more or less likely be stable going forward. Also since Iraq is one of the biggest producers from OPEC, other countries are likely to come to its rescue if things go worse. Add to it the fact that offshore industry is dealing with oversupply of drilling rigs (see blog post: https://marineoffshore.wordpress.com/2014/07/03/oversupply-or-replacement-of-rigs), and you can expect stocks of these drillers to fall again this year.

Watch out for those quarterly earnings report and geopolitical situation in the Middle East if you are keen to invest in these companies.

Shale Oil Imposing Pain On Offshore Drilling Industry

Offshore oil & gas industry is going through a tough phase and its prospects in short to medium run aren’t looking that bright either. The industry will maintain its importance but definitely less so than shale oil. The graphs below might just convince you as well.

So let’s start with world oil production first. In 2014 that figure will be close to 92.5 million barrels per day (bpd). Now see graph below to have a look at top 3 oil producers in the world.

Do you see anything strange? For starters US is now the biggest oil producer in the world producing close to 12.3 million bpd compared with 8.5 million bpd in 2008. That’s almost 45% increase in just 5 years. Majority of that breakneck growth has come from shale oil which is still land based and not offshore drilling.

True that 10~11% growth rate in shale oil production isn’t going to last forever but the short to medium term prospects of shale industry looks very strong. Most of the increase in global oil consumption are indeed well covered by the increase in shale oil. Which in effect will subdue the prospects of offshore oil industry.

Add to it the facts below:

–          Many other countries are looking to extract shale oil.

–          Imminent oversupply of offshore drilling rigs for next 2~3 years.

–          Oil & gas majors cutting their spending.

–          Iran coming out of sanctions.

All points to the fact that offshore oil & gas will remain weak for some time. And offshore drilling contractors are going to feel the pinch even more. Unexpected supply shock from political instability or war might still play a part but most other pointers are facing in the wrong direction.

The industry has faced these sort of rough times before, now let’s see how it will regain its mojo this time round.