McKinsey: only way for oil prices is up

The elements for a recovery in prices are in place in the oil industry, according to the consultancy firm McKinsey.

“One way or another, the factors that sent oil prices way down are changing,” said Scott Nyquist, a McKinsey oil industry expert in Houston.

With the usual caveats about the impossibility of predicting oil prices, he said there are now “two possible scenarios … One is that the current price rally continues and prices, now around US$50 [a barrel], creep upwards this year and next. The other scenario is that supply disruptions get worse, and inventories begin to decline. In that case, prices would rise faster.”

What has led to the industry’s green shoots of recovery?

The Saudi Arabia-led policy of letting prices drop over the past two years to defend market share and force out higher cost producers is working, Mr Nyquist said.

“Deepwater projects are prominent among cancelled new capital projects and US production has begun to decline, as low prices have taken some of the highest-cost assets out of production,” he said, adding that “high costs and ageing assets are also affecting fields in Colombia, Mexico, Nigeria, the North Sea and Russia – all are hurting, and declines in production in these markets are adding up”.

The US government's energy information administration has forecast a net decline in non-Opec production of 400,000 barrels per day, the first such decline in eight years.

The independent US oil sector, where companies using fracking technology to access shale oil were responsible for most of the new oil that led the world into glut over the previous five years, looks likely to face further trouble despite the fact that it had hedged a significant part of its exposure.

As well as hedging, “cancelling projects and cutting capital investment will also help many stay afloat”, Mr Nyquist said.

“That being said, there are only so many tools in the kit, and most have been used. Debt in many energy companies is trading below par and prolonged low prices will certainly begin to drive some players into bankruptcy – sooner rather than later.”

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