There isn’t a single soul in the oil and gas industry who wouldn’t kill for a crystal ball, and at a Thompson and Knight luncheon earlier this week in Dallas, industry insider Reva Goujon was tasked with bringing one.
Goujon serves as vice president of geopolitical analysis for Stratfor, an Austin-based intelligence company that provides clients with a wide-lens view of the geopolitical landscape. Intelligence officers on the ground collect data in six continents and report long before the news reaches the general public. Whether it’s the burgeoning Saudi deficit or the emergence of a new militia in the Nigerian delta, Goujon takes the raw information and transforms it into calculated forecasts for the future.
More than 300 of the region’s biggest players in the energy industry gathered to hear those forecasts and her answer to the $400 billion dollar question: What conditions led to the massive oil supply glut, and when can we expect to climb out of it?
$400 billion is the net amount of oil and gas projects that have been delayed or canceled since 2015, when “lower for longer” prices set in. Goujon was clear on the cause of the decline: “The paradigm shift that the whole world needed time to process was the relentless U.S. oil production, rising from 5.3 million bpd (barrels per day) in 2011 to 9 million in 2014,” she said. “We’re starting to see a correction now, but the bounce is weaker.”
The strength of that recovery relies on a variety of factors, on the both the supply and demand sides. Saudi Arabia still controls the lion’s share of the global supply and therefore proportionate control over prices. And amid growing external security concerns and internal political unease, the Saudis remain unlikely to relinquish market share to other producers. Despite grandiose claims of energy independence by 2020, the current Saudi state remains bound to hydrocarbons. Slashing frivolous spending by the royal family and breaking their addiction to public sector job creation is now imperative, but the Kingdom also needs to take steps to diversify its economy, and that will require massive public investment.
Meanwhile, explained Goujon, Iran has rebounded to pre-sanction production levels much more quickly than predicted. It’s now looking to undercut the Saudis at every opportunity, but the recovery has reached the bounds of what the country’s internal financing apparatus can manage. Iran will require foreign capital to develop the riskier fields that have long lain dormant, and cyclical uncertainty will make capital flow to those projects slow and cautious.
The victim in this price war has been U.S. producers who are increasingly reaching the end of their debt leashes. When prices do rise, U.S. companies who’ve invested in technology should be the quickest to recover, but that will require some organic growth from the global economy—which may be longer in coming.
Goujon sees the destabilization of Europe deepening in the near term. Most European economies are stagnant and burdened with debt, while the migrant crisis and the growth of nativist parties continues to inflame political discord. Europe seems far from creating enough sustained growth to ignite energy demand.
Likewise, China shouldn’t be expected to return to pre-2008 growth levels any time soon. Their consumption-to-GDP level hovers at a meager 36 percent, and the Party is struggling to maintain solidarity as outlooks grow dim. India is certainly ready for growth, but democracies move slowly and the country’s infrastructure problems are deep and persistent.
Despite these concerns, Goujon remains hopefully that the market correction will lead back to a oil supply deficit soon rather than later, and she insists that more demand growth is still out there in places like Southeast Asia, India, and even East Africa. North America also remains a bright spot, with potential developments in technologies and robotics set to spark growth.
Goujon summarized by saying, ‘This price collapse wasn’t just driven by recession,” and therefore, the corresponding recovery will likely come steadily, not in the leap and bounds that the industry saw during the Shale Revolution.
That prognosis, coupled with seeing crude pull its chin above $50 for the first time in seven months, may have reassured the Dallas audience that a slow and steady price recovery may finally be in motion.