The worst in 30

Author Manash Goswami

The chorus of voices saying the current oil market downturn is coming close to that seen in 1986-87 — when prices collapsed to under $20/bl — is getting louder.

The chorus of voices saying the current oil market downturn is coming close to that seen in 1986-87 — when prices collapsed to under $20/bl — is getting louder.

UK bank Barclays is among the latest to sing out. Global upstream spending will decline by 20pc this year over last and by another 3-8pc in 2016,  the bank said. That would be the first time since 1986-87 that upstream spending fell for two consecutive years. The projection comes from a Barclays survey of 175 oil and gas companies between 10 August and 2 September. 

The steepest cuts will be among the North American producers, which are expected to reduce their spending by 35pc in 2015. Those cuts could go deeper if prices drop back to around $30/bl. Spending may fall by another 10-15pc in 2016, assuming the Nymex WTI contract stabilizes in the $50-$60/bl range.

Morgan Stanley was among the first to warn of the severity in the current down turn rivaling 1986, way back in July, but many looked at that outlook with skepticism. Now, more producers seem to be paying attention.

The world’s largest independent oil and gas producer, ConocoPhillips, is shedding 10pc of its global workforce to lower costs. "Our industry is undergoing a dramatic downturn, which has caused us to look at our future workforce needs," the company said.

Key Bakken producer Continental Resources further lowered its capital expenditures guidance for the year by $350mn as it seeks to keep spending within cash inflows. "While we do not believe today's lower commodity prices are sustainable long term, we are committed to living within cash flow until they recover," chief executive Harold Hamm said.

Further cost cutting measures may follow as many producers run out of options to raise funds. Banks may cut oil producers' reserve values by up to 30pc in the fall asset redetermination happening over coming months. Since reserves are the key assets against which companies take out loans or lines of credit, lower values could spell huge trouble.

Looking for a silver lining in all of this? Don’t count on Goldman Sachs. This week it revised downward its Brent and WTI crude price expectations for the fourth quarter of this year and beyond. The bank expects Brent in the fourth quarter to be $45/bl, down from the $53/bl forecast the bank gave in May, and $49.50/bl next year. For WTI, Goldman sees fourth-quarter prices at $40/bl, down from $47/bl, and $45/bl in 2016.

For more information, please contact OilBlog@argusmedia.com

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