The oil industry has taken a beating twice in the last decade: 2008 and 2014. Thousands of seemingly solid jobs evaporated in a matter of months. Companies cut down on expenditure as they struggled to deliver a satisfactory return to shareholders. Some like BP had their problems exacerbated by costly accidents i.e. the 2010 Deepwater Horizon disaster.
As has been the case for more than a century, the industry never remains at the bottom indefinitely. In this regard, there are already signs that oil is looking up. We discuss the key pointers that show a recovery is in the offing.
- Oil Price Is On the Up and Up
The price of oil is the most important indicator of the direction the industry is headed. At the start of the millennium, it seemed that the only trajectory was upward. Even though industry experts understood that they were riding the peak of the commodity super cycle, there was an irrational optimism in the air.
Crude prices exceeded US$100 a barrel and major oil exporting nations were swimming in unprecedented cash reserves.
Then it happened.
First came the 2008 global financial crisis that saw Brent Crude collapse from $140 in July 2008 to under $50 just 6 months later. It would make a steady recovery in subsequent months and eventually surpassed the $100 mark in February 2011.
The price seemed to have stabilized only for it to take a deep dive starting July 2014. By February 2016, Brent Crude was selling at about $35 per barrel. The trend since then has however been largely upward and, as at April 2017, oil is selling at above $50.
- Number of Active Drilling Rigs Static or Rising
Baker Hughes has been tracking active rigs in North America for more than 70 years and international rigs for over 40 years. Its weekly and monthly rig data is highly respected and eagerly anticipated as a barometer of the industry’s health.
A rig is considered active if downward drilling occurred during the majority of the week and the target depth has not yet been reached.
Baker Hughes’ trend data shows that after bottoming out in June 2016 at about 400 active rigs in the United States, that figure has steadily risen to nearly 800 as at March 2017. Similarly, the number of active rigs in Canada has climbed from below 50 in June 2016 to over 300 in March 2017.
Internationally, the growth has not been as dramatic as in North America. However, the precipitous fall that started at the beginning of 2014 appears to have leveled off from June 2016 with the number appearing to hold steady at between 900 and 950 rigs since then.
What does all this mean? Oil companies are growing in confidence about the industry’s future and are no longer as keen on cost cutting as they were just one year ago.
- Emerging Market Oil Consumption Still Growing
A rise in oil consumption is closely linked to economic growth. It is therefore not surprising that as China’s spectacular GDP growth over the last 3 decades shows signs of tapering off, the growth in oil consumption in the world’s second largest economy is bound to slow down.
Still, it is important to note that China’s oil consumption growth of 2.5% in 2016 is still well ahead of developed countries. While not of sufficient weight to pick up China’s slack, other emerging markets such as India are experiencing robust economic growth that can only be positive news for oil sector players over the medium term.
- Positive Outlook on Employment Numbers
According to workforce solutions provider Airswift, nearly 300,000 energy industry jobs were lost worldwide between 2014 and 2016. Jobs are a lagging industry health indicator and are often one of the last signs of recovery. Industry experts are however already projecting a rise in hiring over the next 2-3 years as oil prices continue to edge upward.
For instance, a July 2016 research note from Goldman Sachs anticipated that the US oil industry may create nearly 100,000 new jobs by 2018. Even if the rest of the world does not see similar job growth over the same period, the medium term prospects are positive.
Conclusion
Past performance is not an assurance of future trends. However, the most important indicators provide a basis for the rational assumption that the oil industry is gradually moving back to its winning days once again.
I would add that the supply imbalance is correcting itself, both in crude stocks and gasoline. We are closer to a shortage than many people believe.