What’s “Up” With Oil & Gas?
By Nicole M., 5/20/16
What a difference a year makes, especially true right now in the Oil & Gas industry. In June 2014, the price of a barrel of crude oil from West Texas Intermediate was $107.26. However, the happy days did not last long. By Christmas 2014, the price had dropped to $54.73 and for the most part, has continued to drop even further. In January and February 2016, the price dropped below $30 a barrel. Currently, the price is $48.54 (base on the May 20, 2016 NASDAQ index). This leads many to wonder what’s up, or more appropriately, down with oil and gas right now?
According to an article by Evan Tarver entitled “4 Reasons Why The Price of Crude Oil Dropped” on Investopedia.com, there are several reasons affecting the price of a barrel of oil. The biggest driver, according to this article, is the strong U.S. dollar which is at a 12-year high against the Euro. When the value of the dollar goes up, the value of commodities drops. In addition, some of the countries in OPEC, the Organization of Petroleum Exporting Countries, have also been unwilling to cut production, which has led to the second contributing factor – an oversupply of crude oil.
While supply is up, the demand for crude oil is decreasing. One reason for the decrease is that many European and surrounding countries have struggling economies. And China’s economy, who is the world’s largest importer of oil, is hard to gauge due to its devaluation of its currency. Most analysts suspect it is fairing much worse than suspected.
The other factor contributing to the decreased demand is the global initiative to move away from fossil fuel production and consumption. In fact, at the December 2015 COP21 Summit in Paris, France, close to 200 nations agreed to a goal of limiting global temperature increases to less than two degrees Celsius above preindustrial levels and to reach net-zero greenhouse gas emissions in the second half of the century. Pressure is now on the automotive industry to produce more electric vehicles and more vehicles that have an average fuel-efficiency of 34 miles per gallon.
The fourth contributing factor to the sharp decline in crude oil prices is the Iran Nuclear Deal. Tarver writes, “The Iran nuclear deal is a preliminary framework agreement reached between Iran and a group of world powers. The framework seeks to redesign, convert and reduce Iran’s nuclear facilities. The U.S. nuclear deal with Iran allows more Iranian oil exports. The deal removes Western sanctions against Iran, and investors fear it will add to the world’s oversupply of oil. Markets have already reacted to this news by decreasing the price of crude oil.”
So what will happen next? A new article from CNBC published May 23, 2016 predict a “fundamental price recovery” based on information obtained from Jefferies’ Jason Gammel, an energy analyst. “Supply outages and growing demand from China mean crude prices will come into ‘much better balance’ in the next few months…the oil market had swung from oversupply to undersupply in April thanks to disruptions in production in Nigeria and Alberta, Canada taking around 2 million barrels per day out of the market.”
As far as the future of petroleum companies, only time will tell how well these companies are able to adapt and alter their strategies and approaches to the current environmental and economic conditions. Perhaps they will rely on their core competencies and outpace their competition. Perhaps they will shift their focus from upstream to downstream companies or vice versa? Perhaps they will exploit new technologies to innovate, cut costs and transform into a company that helps produce lower-emissions products. What is clear is that a shift is happening and petroleum companies need to embrace it for the future of their companies along with all of the employees they employ and all of the other industries that are affected by theirs.
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