Fundamental Analysis

Oil companies shoulder pain of downturn with lower output

A worker checks the valve of an oil pipe at the Lukoil company owned Imilorskoye oil field outside the Siberian city of Kogalym, Russia, January 25, 2016. REUTERS/Sergei Karpukhin/File Photo

By Ron Bousso

LONDON (Reuters) – The world’s listed oil companies have slashed oil output by 2.4 percent so far this year during one of the industry’s worst downturns as OPEC battles to agree on its first production cut since 2008.

The aggregated production of 109 listed companies that produce more than a third of the world’s oil fell in the third quarter of 2016 by 838,000 barrels per day from a year earlier to 33.88 million bpd, data provided by Morgan Stanley (NYSE:MS) showed.

By comparison, the Organization of the Petroleum Exporting Countries produced 33.64 million bpd in October. OPEC has struggled to agree on a joint production freeze or cut to support oil prices before its Nov. 30 meeting in Vienna.

In the second quarter of 2016, the companies reduced production by nearly 930,000 bpd, according to Morgan Stanley.

The firms include national oil champions of China, Russia and Brazil, international producers such as Exxon Mobil (N:XOM) and Royal Dutch Shell (L:RDSa), as well as U.S. shale oil producers like EOG Resources (N:EOG) and Occidental Petroleum (N:OXY).

The drop in oil companies’ output is particularly compelling given the increase in 2015, when third-quarter production rose by some 1.9 million bpd.

“Clearly, we have seen a large swing in the year-on-year trend in production, from strong growth as recent as a year ago, now to steep decline. This is the outcome of the strong cutbacks in investment,” Morgan Stanley equity analyst Martijn Rats said.

Capital expenditure for the companies combined more than halved from $136 billion in the third quarter of 2014 to $58 billion in the same period this year, according to Rats.

Oil executives and the International Energy Agency have warned that a sharp drop in global investment in oil and gas would result in a supply shortage by the end of the decade.

Large oilfields, such as deepwater developments off the coasts of the United States, Brazil, Africa and Southeast Asia, typically take three to five years and billions in investment to develop.

Cost reductions and increased efficiencies have only partly offset the drop in production as a result of the lower investment. Technological advancements have also helped boost onshore U.S shale production.

“These declines should temporarily soften in 2017 as new fields are coming on-stream in Canada, Brazil, the former Soviet Union and U.S. tight oil probably stabilizes,” Rats said.

“Still, unless investment rebounds relatively soon, this steep downward trend is likely to resume in 2018 and beyond.”

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Vladimir Ribakov

Following 11+ years of trading experience, trading my own accounts as well as for hedge funds and brokerages, I have decided to fulfill my destiny and to personally mentor Forex and Commodities traders. When I released the “Broker Nightmare” (software that hides trades from brokers) 8 years ago, I found an overwhelming number of frustrated people who genuinely wanted to learn how to trade the Forex market, but instead found themselves scammed and misled. Over the years I have also release other trading systems based on my trading strategies, and met a lot of people on my worldwide Forex seminars. We’ve formed a close Forex community and we meet once or twice a year in various locations in Europe.

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