Is the oil rally over? A million dollar question indeed!
As already seen, OPEC has maintained its side of the bargain and continues to comply with the landmark accord to cut production announced on Nov 30, 2016. Though this was the best shot to recover oil prices, the crude price advancement has been cut short by the resurgence of exploration and production by U.S. shale payers. No wonder the commodity has begun to slip again.
Adding to the woes, The Goldman Sachs Group Inc. GS recently projected oil weakness for the next three years. With the investment bank’s forecast, all hopes are seem to be lost for the commodity recovering anytime soon.
Factors like these should have compelled investors to pull their money out of the energy sector, but we note that the refining industry is among the few from the sector that are set to gain from the downturn. This is mainly because companies from this space profit from buying raw oil at low prices.
OPEC Deal Fails to Recover Crude
It is a fact that the primary reason for oil price weakness is the market remaining oversupplied since mid-2014. Hence, curbing output is the only feasible means to recover oil prices. To this end, OPEC and non-OPEC members joined forces to limit production. Following the historic accord, oil rallied from Nov 30, 2016 to the first week of Mar 2017.
Though the oil cartel kept its promise, U.S shale producers started gathering on the oil patches over the weeks and continued increasing production. The shale players started gaining market share at the expense of OPEC, while oil once again tumbled below the $50 per barrel mark.
The huge downward pressure on the commodity created by shale drillers has completely offset OPEC’s effort to boost crude prices. In fact, West Texas Intermediate (WTI) crude recently touched the $47.01 per barrel mark – the lowest level since Nov 30, 2016. Several analysts are of the opinion that this might well be the beginning of a new phase of troubles for the beleaguered sector that only just started to recover.
Goldman Sachs Foresees Another Oil Glut
According tothe investment bank, the coming three years will mark another phase of extensive crude weaknesses. A surge in oil supply will flood the commodity market as developments planned years before come online. The projects – especially those in Brazil, Russia, Canada and the Gulf of Mexico – are worth billions of dollars and many were initiated when the commodity was trading above $100 per barrel.
Goldman Sachs said, “2017–19 is likely to see the largest increase in mega projects production in history, as the record 2011-13 capex commitment yields fruit.”
Scope of the Refining Industry
It is clear that the continued increase in production by U.S shale players along with Goldman Sachs’ projection of another supply glut is likely to push the commodity price downward. It will not be surprising if crude tumbles to a new low.
However, the situation is a boon in disguise for refiners. These companies have every reason to rejoice as their input cost will fall sharply. Companies from this industry produce refined oil and petroleum products after buying raw crude. It goes without saying that a decrease in input cost will ultimately translate to huge profitability.