Oil prices may be up 2.28% today to $46.18, but bearish factors remain. Oil is currently down -13.50% year to date and down -51.90% in the past year, marking the worst performing commodity during those time periods. The supply and demand glut continues to ravage prices, as oil producers largely stay on target and continue to produce oil. That being said, oil has found some unstable support lately after Saudi Arabian King Abdullah died on January 23rd. While it is likely that the new leadership will continue with the current oil stance, traders and oil producers remain on their toes and continue to look for any possible clue for a sign of production cuts. Oppenheimer recently released an industry analysis paper on the state of the oil industry and what events might likely occur, as the price of oil continues to see downward pressure.
Oil prices: “Shock, denial, panic, capitulation”
Oppenheimer analysts begin by saying that oil is obviously affected by global events and phenomenon. Additionally, they acknowledge that oil speculation can add increased pressure to above or below sustainable levels, depending on the environment. Oil collapse and uncertainty creates a series of events that lead to “shock, denial, panic, capitulation”. This occurs especially with oil companies and producers that look to capital expenditure cuts and operating expense cuts in order to save money and survive the fall in oil prices. Oppenheimer analysts see this dramatic drop in oil prices as a potential to “accelerate OPEC demise”. In response to the potential OPEC crisis, Oppenheimer suggests that oil importing nations attempt to emphasis conservation of energy and oil, all the while continuing to promote renewable energy resources and programs.
OPEC’s survival in doubt
As oil exports continue to decline and OPEC nations continue to see dwindling revenues, these nations will be forced to look for other sources of revenue to survive. Oppenheimer analysts add that while OPEC nations have been able to balance budgets and remain in control in the past during oil price collapses, their inability to focus on diversification during the recent decades of high oil prices will lead to their fall. The research company sees Saudi Arabian production to continue at current levels, even though the oil giant country is seeing oil revenues $300 million lower per day after the collapse. The Saudi government has continued to stand fast on its oil policies in the hopes that other oil producing countries such as Mexico, Russia, Iran, Norway, etc will agree to even cuts in oil production.
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Turning to energy companies, Oppenheimer expresses concern for the survival of “high cost producers with low quality assets and less financial flexibility”. Additionally, the equity research paper suggests that even if oil rallies back to $70 a barrel, companies will continue to see negative cash flow figures, even without huge cuts to capital expenditures and operating expenditures. Oppenheimer also forecasts exploration and producing energy companies to report losses in the first and second quarter 2015, with some unlucky few that could continue to see losses for the rest of 2015. Overall, it certainly seems that, according to Oppenheimer analysts, companies and countries with ties to oil could continue to feel the pain in 2015, even if oil rallies back to $70 a barrel.