Oppenheimer has published its latest industry update in which it discusses OPEC’s current struggles in the midst of low world oil prices.
In its report titled “Will OPEC Have the Last Laugh Or Will It Become Irrelevant?“, the firm details how OPEC is suffering as oil export revenues plunged by 50%, forcing members into spending cuts and increased borrowing. Both of these factors could eventually destabilize governments and cause civil unrest, if alternatives cannot be found.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
Rejection of shale looks to have been disastrous for OPEC
Oppenheimer believes that the current problems can be partly blamed on a rejection of the shale revolution, which increased domestic U.S. oil production by over 4 million barrels per day. Kuwait and UAE’s combined daily output is less than that figure.
By disregarding shale technology, OPEC picked a fight against a rapidly developing industry. Oppenheimer believes shale technology is the future, and OPEC is the past. The next best step for OPEC is to diversify its economy, cut spending and embrace technology.
Analysts believe that by adopting new technology, cost control and consolidation, those OPEC oil companies that survive will be more resilient to sudden drops in world oil prices. At the same time, Oppenheimer trolls Goldman Sachs and dismisses the $20 oil scenario, saying “we dismiss the $20 oil scenario, as we dismissed the $200 oil view in 2008—both came from the same source”. claiming that oil prices will remain lower for longer. The market is searching for a new normal which the firm believes sits between $65-75.
Continued low prices could force industry consolidation
As it stands all oil producing companies are outspending cash flow, and most would be in the same situation in a sub-$80 oil world. We may see a raft of companies selling out. Further reductions in CAPEX, operating costs and expenses must be implemented, and headcount should also fall in order to adapt to a $60 world.
Although OPEC may be tempted to celebrate as its production strategy drives marginal producers towards the exit, it should be wary that any decline in shale production will probably be temporary. Oppenheimer believes that tech improvements, CAPEX cuts, OPEX, reduction and service industry cost deflation mean that $60 is the new break-even.
The lifting of sanctions on Iran could cause depressed oil prices as the current oversupply is exacerbated by renewed exports from Iran. International oil companies, especially the Europeans, look best placed to benefit.
Oppenheimer believes that although self-help programs have reduced costs and improved efficiency, they cannot beat declining oil prices. The firm claims industry consolidation may follow, taking cost saving measures to a new level and creating new companies.