In Part 1, we examined several sources of economic projections, starting with a presentation for the overall economy and leading into presentations of the steel and construction sectors. Part 2 will examine the oil & gas industry, one in which we are particularly active.
All four sources reviewed agree that 2018 will be a year of rebound that perhaps establishes a “new normal” for the industry. Management consulting firm Credera published a report that looked back at 2017 as a year of rising production but sluggish demand, which put downward pressure on prices of crude oil. They see 2018 as a year of oil prices achieving a stable upward trajectory, probably in the $55–$65/barrel. They also see rig counts increasing in the first half of the year but stalling out in the second half.
The Nasdaq report on the industry shares the other firms’ positive expectations for prices, believing that crude prices in 2018 will typically stay above the $60/barrel point, which they consider to be a psychologically important level. They also expect the firms they put in the “big oil” category to see year-over-year growth in 2018.
They attribute this growth expectation to a number of industry fundamentals that are improving,
- The OPEC production cuts are holding and expected to continue to the end of 2018, putting constraints on production.
- Inventory drawdowns are tightening the market, moving us from a surplus to a deficit, with inventory running about 19% below a year ago.
- Booming exports are expected to continue, building on the momentum established in 2017, which saw an all-time high of 1.7 million barrels per day reached in October.
- They cited “backwardation”, which they described as a period when near-term futures trade at a premium compared to futures dated further out, as a bullish signal.
The Nasdaq report considers 2018 to be a pivotal year, with demand surging to more than 100 million barrels per day. This increasing demand, against a narrow pipeline of new production projects, should lead to rising or stable prices.
Financial consulting firm Deloitte agrees that 2018 will represent changing times, with the US becoming a major energy exporter and low-cost supplier. This could have geo-political implications, such as affecting NAFTA negotiations. They also see sustainable cost reductions, with the break-even point becoming 30%–50% lower than 2015 levels. Oilfield service firms are still suffering, which is expected to drive more consolidation among those firms. They also cite OPEC production levels to continue through 2018, but they feel that stable production alone is not enough and that more demand is required to boost prices.
Survey Results–Rigzone, an industry (oil & gas) employment site, conducted a survey of its users, eliciting 1,000 responses, with the following results:
- Respondents expressed positive expectations for prices, believing they will be in the $65–$75/barrel range for 2018.
- Upstream is expected to have the best employment growth opportunity (46.6%), while 22% expect no employment growth, 16.6% expect downstream to have the most opportunity for employment, and 15.3% think midstream will experience the best employment growth.
- Opinions for the overall economic outlook show 38% to be hopeful, 30% to be concerned, and 24% to be optimistic.
- Wage growth is positive, as are corporate earnings and revenues.
Nasdaq’s report sees soaring demand for natural gas due to a shift to lower-carbon fuels. They project domestic production to hit a record in 2018 of 81.7 billion cubic feet per day. The expected result of soaring production will be lower prices. Deloitte agrees, expecting supply growth to be greater in 2018 than demand growth, continuing low prices. They also see long-term oil contracts being replaced with shorter-term natural gas contracts.
Nasdaq believes that demand is rising the most in the Asia-Pacific area, resulting in more than 50% of the US domestic production to be exported. This growth in exports of natural gas will be supported by five new LNG facilities that are expected to begin operations in 2018. In the long term, they project increased exports to cause prices to rise to more than $3 per million BTUs.
Credera praises digital implementation, begun in 2017 in analytics, data capture, remote monitoring, and productivity improvements, and believes that this will accelerate in 2018. They describe data driven operating model opportunities in both the supply chain and the back office. This digital implementation and automation is indicated to be a force constraining rising hiring numbers, but calling the overall outlook one of renewed optimism.
Deloitte also places emphasis on digital technologies as the path to efficiency gains and to becoming a low-cost supplier. They believe there will be much innovation across the sector and up and down the entire value chain. They describe it as the “digital cavalry”, though they believe it will rescue only the firms that join in the implementation.
Optimism seems to be the key watchword for the industry in 2018. The signs all seem to be pointing up, and the Rigzone survey had more than 50% of respondents either hopeful or optimistic.