Argus Oil Blog: Grave new world

Author Ben Winkley

The new year ushers in a new world for the oil industry. Traders returned to their desks just in time to watch first benchmark US crude futures then Brent plummet through $50/bl for the first time in almost six years.

The new year ushers in a new world for the oil industry. Traders returned to their desks just in time to watch first benchmark US crude futures then Brent plummet through $50/bl for the first time in almost six years.

This changes everything and not just the things one would expect, such as rig utilisation rates and dividend pay outs. For better or worse, the ground is also shifting beneath inflation forecasters, stock pickers, consumers and retailers keen to brag of cuts in pump prices. An opinion piece published by Iran’s oil ministry news service Shana, perhaps unsurprisingly, thinks the changes are for worse rather than better, and argues that low prices are bad for everyone, everywhere. But even Shana couldn’t match Bloomberg’s link between falling oil prices and the closure of a Venezuelan ice cream parlour famed for its trout-flavoured offering.

The upcoming company earnings season, which kicks off in earnest in late January, should be extremely interesting as explorers, producers and shippers scrabble to show investors they are able to adjust to this new reality. Already there are signs of change. Canada-based producer Bankers' Petroleum is keeping an eye on the viability of its obscure Albania heavy crude. And Swedish upstream independent Lundin Petroleum today sliced a third off its capital expenditure for this year. More changes will follow in the coming weeks and months.

There is no short-term end in sight, according to BofA Merrill Lynch, which called $50/bl oil back in November. The bank expects a six-month lag before demand reacts to lower prices, and even then pointedly notes that 50pc of global oil demand growth in the last 10 years has come from oil producing countries. “Either production guidance for 2015 goes negative, global activity speeds up, or Saudi blinks,” it said. But Saudi Arabia, first through its oil minister Ali Naimi then, in case that wasn’t strong enough, through King Abdullah bin Abdel-Aziz, appears not to be in the mood for rolling back.

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