Sub-$100 per barrel may translate into long term demand growth – DNB Report

Norway’s leading investment bank DNB ASA projects crude oil price will continue trading at below $100 a barrel level, with the price weakness potentially weighing on offshore and unconventional oil and gas exploration and production (E&P) activity globally.

Over two thirds of the oil firms surveyed by DNB Markets in August have signaled their intent to decrease or maintain E&P spending from 2015 to 2016.

The DNB analyst also cautioned against a developing supply glut that will further swing the market against the favor of oilfield services provider.

The supply condition may differ across different segments of the oilfield services sector, but “in general, the decrease in demand is matched by an increase in supply.”

Seismic and exploration drilling will be the first segments experiencing spending cuts, according to DNB’s projection, even though supermajors and large cap independents have expressed the intent to carry on with their exploration activities.

Meanwhile, rig operating day rates in the ultra deepwater segment have experienced reductions, resulting in lower valuations for the offshore drilling asset class.

Lower offshore E&P spending will serve the purpose of Organization of Petroleum Exporting Countries’ (OPEC) leading member nation, Saudi Arabia, which has held back on production cut to boost oil prices. The Saudis stand in the best position to benefit from additional demand created from sub-$100 oil prices, which are hitting offshore E&P as well as slowing down the spread of shale gas revolution from the US to the rest of the world.

Shale production contributed significantly to the growth in crude oil production in the United States, which is seen to have more than matched supply outages arising from political turmoil in the OPEC nations including Libya, South Sudan and Iran until 2014.

Oil production from the four states grew 3.3 million barrels per day since 2010, bringing US monthly crude output to 8.7 million barrels per day, almost matching the level in the 1980s.

Following the resumption of oil production in Libya, crude product inventories have built up among both Organization of Economic Cooperation and Development (OECD) and non-OECD nations on the back of an exponential increase in US shale production.

DNB assumed at $80 a barrel oil prices, demand will rise to 1 million barrels per day in 2015, from 700,000 barrels per day currently, while slowing down production growth in the United States.

Meanwhile, global supply is growing faster than demand, indicating further “room for oil price to fall before recovery”. Lower oil prices however, could stimulate economic growth especially in non-crude producing countries. The International Energy Agency estimates every $10 decrease in oil price could lift global economic growth by 0.5 percent.