Cut your cloth

Author Ben Winkley

There’s a storm coming. In case Opec hadn’t made it quite clear enough already, the UAE minister today reaffirmed that there will be no compromise. Opec is no longer the arbiter of price and everyone will have to cut their cloth accordingly.

There’s a storm coming. In case Opec hadn’t made it quite clear enough already, the UAE minister today reaffirmed that there will be no compromise. Opec is no longer the arbiter of price and everyone will have to cut their cloth accordingly.

And cloth is being cut. In the North Sea, Ithaca will cut 60pc of its capital expenditure, which will have a knock-on effect for oil-services companies such as Lamprell. It said companies will be chasing fewer projects, and margins will be squeezed.

A small deal among explorers Sound Oil and Antrim Energy has been called off, as the economics of deepwater exploration are reappraised in the new price environment. Shell Canada could lay off up to 10pc of the 3,000 workers at its Athabasca oil sands mining project in Alberta. Not as a direct result of falling prices, the company said — but Canadian heavy crudes can now be bought for as little as $30/bl.

And all this in the past four days. The fall in the price of crude has gone from a correction to a plunge and now looks like a rout — Brent has fallen by more than 20pc in the 13 days that so far make up 2015.

Goldman Sachs has listened to Opec, and has decided to discount the organisation from the market. As the investment bank took a blade to its crude forecasts, it also signalled a quantum shift in how it assesses the market on a par with the formation of Opec in the early 1970s, the mid-1980s rise of the commodity trader and the coming of the commodity investor in the early part of this century. Goldman Sachs says that in the absence of Opec action, cost deflation will be the key driver of oil prices.

"Unlike in the past, when the rebalancing took place primarily in the 'physical' and 'paper' markets, today the 'capital' markets are playing the dominant role. This new source of adjustment is generating not only a high level of disorientation, but also the need for an entirely new paradigm from which to view these markets," Goldman Sachs said.

In other words, cloth cutting.

Comments

Leave a reply

Required
Please fill in your name
The name is not correct (only letters allowed)