The first quarter 2016 reporting season is in full swing for many of the oil and gas companies. It was never going to be an easy ride, but the market has been pleasantly surprised that many of the leading companies are beating analysts’ forecasts by reporting better than expected results. The impact of cost cutting is feeding to the bottom line and combined with rising production, resilient refining margins and positive contribution from trading activities, the share price of most of the International Oil Companies have been rising steadily, despite the ongoing challenges with commodity prices.
So is the sentiment changing? It is still early days, but many analysts and industry commentators are now reporting more oil price upside than downside. With oil trading at around $47/bbl today, the forward market is currently trading over $50/bbl in 2017 and closer to $55/bbl in 2020. This price sentiment is a reflection of the fact that the overall over supply situation is narrowing from around 3 million barrels a day excess supply in early 2015 to less than 1.5 million barrels a day in early 2016. With oil demand expected to grow more than 1.2 million barrels a day in 2016, there could a brighter light at the end of what has been a long and often dark tunnel. Of course there are many factors, which can change this picture, including ongoing uncertainty around Iran’s ability and Saudi Arabia’s willingness to ramp up production.
Despite the ongoing tough challenges in the North Sea, it is encouraging to see that some of this more positive sentiment is echoed by the 2016 Energy Voice survey. Almost 75% of those completing the survey expect oil prices to be in excess of $60/bbl by 2020. Combined with a sharp focus on managing cost and efficiency, as supported by 70% of those surveyed, and improved incentives for exploration, supported by over 30% of the respondents, there clearly is a recognition that the remaining prize in the North Sea is worth fighting for.
Macroeconomics and politics created the down cycle. It will be the North Sea’s track record of resilience and innovation, which can help the region to be successful again.
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