As originally published in ISM’s Inside Supply Management
By: ProcurementIQ Analyst, Agiimaa Kruchkin
According to the U.S. Energy Information Administration, U.S. crude oil production jumped 26.5 percent from 2013 to 2015. This significant increase in production primarily resulted from technological advancements. Namely, hydraulic fracturing and directional drilling services have helped boost the rate at which oil and gas can be extracted, flooding the market with cheaper oil and gas. These innovative production methods have transformed the landscape of the oil and gas industry by resulting in global oversupply, which has sent oil and gas prices plummeting.
Although adversity is nothing new to operators in commodity markets, the collapse in oil and gas prices has introduced the industry to new lows since June 2014. According to ProcurementIQ, the oil and natural gas price index dropped 47.1 percent from 2014 to 2015, and is anticipated to decline further by double digits during 2016. On the back of weakening prices, the U.S. rotary rig count, a measure of oil and gas drilling activity, dropped 59 percent from March 2015 to March 2016, while the global rig count fell 41 percent during the same period. On a related note, stark investment cuts in drilling and exploration projects have slashed demand and undermined price growth for oil and gas support services and equipment. These trends have plagued the oil and gas industry operators in the United States and abroad, spurring an estimated 250,000 industry-wide layoffs and a rash of bankruptcies as many operators have been unable to remain profitable.
In response to these hardships, some members of OPEC have urged for production cuts to place upward pressure on prices. Even if approved, however, the proposed OPEC plan to freeze output at current levels is unlikely to change the pricing environment. Persisting challenges will continue moderating demand and price growth for oil and gas support solutions such as coiled tubing and slickline services that help maintain oil and gas production wells. Moreover, to reduce costs, oil and gas producers will increasingly rent equipment instead of purchasing it, further eroding price growth for suppliers of oil and gas machinery. Thus, unless production rates decline worldwide, oil and gas prices are unlikely to rebound significantly, keeping the industry in distress through 2016.
Although the U.S. oil and gas production rate will continue to lose steam due to oversupply, ProcurementIQ anticipates the world price of crude oil to bounce back at an estimated average annual rate of 13 percent from 2016 to 2019. Nevertheless, the price per barrel will still remain significantly below the 2013 highs. As such, challenges for the oil and gas industry are likely to persist through 2019.