David Bernal, senior solutions consultant for Allegro
Development Corporation, EMEA.
The international oil industry’s current focus is
on low crude oil prices and the headcount redundancies and rig
shutdowns that inevitably follow. This is causing too many
energy traders to scurry for cover unnecessarily and to miss
out on the opportunity to make some smart money.
In the past, a downward move of 50 per cent would have meant
disaster for the oil and gas industry. However, a convergence
of new factors this time suggests a different view of what's
happening. If you can read between the lines, you can seize
your share of opportunities while prices are down and march
into the next cycle well ahead of your competition.
The price is dropping but production
In spite of lower prices and enduring dire news in the markets,
the fundamentals generally point to an increased need for oil.
If prices go back to the $60-$70 a barrel range in the next
year and stay there for a reasonable period of time, worldwide
production will have to respond.
While many wells have been closed and headcount reduced, the
infrastructure is still there to scale up at short notice. The
recent volatility has created a much leaner breed of oil
companies and, from a logistics standpoint, a multitude of
options have emerged in the past five years –
including rail, barge and tankers, to name a few.
In 2015, oil drilling and information technology have combined
to create a perfect storm of capability and agility that will
allow oil markets to respond with a speed typically only seen
in the digital realm.
Five years ago it could take as long as nine months to get oil
out of the ground. Today, thanks to rapid advances in drilling
and information technology, it takes about 30 days to see
results. You can literally go on holiday at the start of the
process and come back to a producing well.
Consequently, the need for transport to market
hasn’t dropped. Oil tankers, pipelines, rail
systems and the tracking technology behind these modes have
grown in sophistication. As a result, there may be no better
time to be a trader – and an investor - in and within
the global oil-transportation business.
The abundance of supply is placing downward pressure on prices,
with supply growth outside of OPEC nations rising at the
fastest rate. According to the International Energy Agency,
non-OPEC countries produced 1.9 million more barrels per day in
2014 than they did a year ago, with the US leading the way at
1.1 million barrels.
So, generally speaking, production is up and, as producers
become more efficient, the number of rigs required to yield the
same amount of oil naturally diminishes. Rig count reductions
are having little to no impact on actual production. What
is really happening is that the industry is taking advantage of
this opportunity to shut down under-performing rigs.
Rigs: quality v quantity – what a difference
technology can make
Technology is accelerating the capabilities in oil field
production and, as time passes, advancements in pad drilling
and rig mobility will only ensure more of the same, rendering
the number of rig counts as a measure of industry health
Considering advancements in the way wells are drilled today,
it’s not unusual for production rates at any given
site to peak early and yield faster than they did in the past.
The peaks are nearly three times higher than they were just
five years ago, creating enhanced production rates, even during
decline, due to drilling efficiencies realised by more
effective horizontal drilling and, particularly in the US, by
hydraulic fracturing practices.
Clearly, the ability to locate wells that promise higher oil
output, combined with the speed at which wells reach peak
production, is supporting a quality versus quantity approach to
the oil and gas business. These can be directly traced to
improvements in technology. These advancements make it possible
for oil companies to turn a profit, even at today's depressed
market prices, as the cost of producing oil continues to fall
So, how should traders and investors alike react to the media's
obsession with low oil prices and industry layoffs?
In my opinion, two camps will emerge from the current industry
cycle: those who curb their innovation, shrink their business
and limit their trading and portfolio exposure in lock step
with the price of oil, and those who take advantage of the
opportunity to make a profit. The latter group will increase
their IT capability and invest in the right technology to
better identify opportunities and manage risks, positioning
themselves for aggressive growth and profit when the cycle
Which camp do you want to be in?