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Crude Oil Prices Drop to 12-year Low

Posted by: Matthew Bone 19 Jan 16  | Power
Crude Oil Prices Hit New 12-year Low...
 but the industry soldiers on...




Oil prices have been in freefall for months, and they show little sign of bottoming out any time soon. Last week, according to Sky News, the RAC predicted that the crash could see oil costing less than bottled water after Brent crude oil dropped below $30 per barrel last Wednesday. This drop represents a 30% decrease in Brent crude prices, and a new 12-year low.

The RAC predict a further slide to $20 a barrel, leading to petrol prices as low as 90p/litre at the cheapest forecourts, and the Standard Chartered bank said that oil prices will only stop falling when the market intervenes. “In the extreme case, the only definition of a floor would come when the entire market felt that prices had undershot too far. That is likely to be a very low price,” they said, putting the floor at roughly $10 a barrel. A price this low would see petrol and diesel slipping to just 86p/litre (for comparison, Tesco lists one 75cl bottle of Perrier sparkling water at £0.96 – making a litre £1.26 - which would make the cost of fuel roughly 68% of the cost of the water).

The freefall of crude oil prices is largely a result of a glut of crude oil in production, as well as the lifting of sanctions on Iran which will allow the country to begin exporting crude oil once again – Reuters estimate that Iran is ready to ship 1.1MMbpd of crude oil in January of this year, which represents 20% more than December’s exports. According to the BBC, major producers are currently delivering 2-2.5 million barrels per day above demand, so the re-entry of Iran to the market could explode this oversupply into unmanageable proportions.

Most of us ignored Ed Morse (Head of Commodities Research at Citigroup) 11 months ago when he said oil could drop as low as $20. All of us in the industry are paying attention now though as oil prices hit $29 on Monday, their lowest since 2003.

As we start 2016 it has been reported that the Oil and Gas industry saw more than 250,000 layoffs in 2015 alone. Unfortunately, as we continue to see the oil price drop, there will inevitably be more redundancies to come in 2016.

This decline has gone on for a lot longer and dropped a lot further than anyone expected. The concerning thing for me is the uncertainty – nobody knows what is going to happen next and how long this ‘glut’ will last. With OPEC standing firm, China’s economy growing at its slowest rate in 25 years and Iran’s sanctions being lifted we find ourselves in unchartered territory.

With that said, the situation certainly isn’t all doom and gloom. We are still in an incredibly lucrative industry which forms the backbone of many economies across the world. OPEC is standing strong with their refusal to lower production levels meaning there is simply surplus amounts of oil available at the moment, but their refusal to scale back production means that we aren’t seeing the level of job cuts in the Middle East that we are in the rest of the world. It’s true that we do all have to accept that NOC’s and IOC’s are demanding 30%+ reductions on costs and in turn salaries and day rates but there are jobs out there.

For me, as a Recruitment Manager, things have certainly changed a lot since 2014. We have of course seen a drop in revenue from our permanent recruitment business but we are seeing growth in terms of contract business. We have seen many of the companies in the industry going very public with the number of redundancies they are making, but these high profile, multi-billion-dollar projects still require high levels of technical expertise. It is in this situation that we are often approached for consultants to go in on a day rate and get the job done.

The labour market in the GCC is holding strong. Of course, we are not seeing the huge amount of hires we were back in 2011/2012 but there is still a lot going on. The UAE and Kuwait are stand out countries for me with Kuwait awarding $30 billion worth of projects last year despite the low oil price.

The big winners during this time are companies within the Renewable Energy sector, especially the offshore Wind Industry. Companies are benefiting from the high number of highly qualified personnel that are available at the moment with easily transferrable skill sets. The wind industry predicts 19% annual growth between 2015-2024, and the Solar Industry predicts 20% year on year growth.  

The Oil & Gas industry is a whole different environment now, and the sooner we accept this truth, and adapt to it, the better.

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