The oil industry is a juggernaut in the modern economy. However, it has been having some shaky years recently. 2018, in particular, has not been a good year as it ended in losses. It is a product of a couple of things happening, from issues with sanctions and a generally weakening market. This is not a good sign as the industry only recently recovered from another big slump in 2015. Still, according to analysts things may continue to be rocky in 2019.
A Sudden Downward Spiral
At the start of 2018 things looked to be very promising for the oil industry. From January to October, big oil companies like Brent and West Texas Intermediate(WTI) were experiencing good numbers. Brent was netting an average of $86 per barrel and WTI getting about $76 per barrel. That was until October, and the U.S. granted bigger-than-expected waivers to importers. This also coincided with declining market demand.
The problem right now is that there is more supply than demand. With the waivers, the U.S. gave the market suddenly flush with more oil than they can do with. As Andy Lipow, president of Lipow Oil Associates in Houston said: “Producers found themselves competing with additional supplies from the U.S. that overwhelmed the market.”
Thus Brent saw a 19.5% decline while WTI went down hard at 25%. As of Monday, Brent was able to go back up one percent at $53.80 a barrel. WTI, on the other hand, settled in at $45.41per barrel. Analysts see projections in 2019 to be in bad shape as well with what was supposed to be a $74 average price at the end of the 3rd quarter tumbling down to about $69.13.
Cutting Down the Expenses
This is not the first time something like this happened. The oil industry saw a similar deep dive in 2014 with a gross oversupply. This saw many companies hit the bottom hard, some even having to file for bankruptcy. As things are just starting to look bad for oil, many companies are looking to cut down on their expenses, as hard as that can be.
In 2018, drillers in the U.S. put in about 138 oil rigs. This number will likely not grow. With current prices coming it at below break-even things are looking pretty bleak. America recently beat their all-time production record of more than 11.5 million barrels per day (bpd) back in 2017. However, due to market conditions organizations like OPEC+ or Organization of the Petroleum Exporting Countries and its allies including Russia plan huge cut downs.
For starters, their plan is to cut oil production by 1.2 million bpd. It is good that is acting immediately as this sudden turn of events can be very bad for the industry as a whole. Although projections right now are not promising, it might be a waiting game. The cut in production will take a while before taking any effect and having a clear result in terms of profits.
Things might not be so dark for the industry in the end. There are still concerns about trade deals between the U.S. and China. Things have been murky on that end to with America acting seemingly on impulse meanwhile China might be showing cracks in their proverbial wall.
One factor that is not really examined at is buyer behavior. In a time where there is a rising concern about global warming and other environmental issues, people are showing less inclination for oil products. There are even worldwide protests and activism movements to prevent further climate change.