Another day, another catastrophic dip in the oil price. On Monday the Brent benchmark continued its steady slide lower, hitting lows of $36.05 per barrel in the process. Prices have recovered some ground but are still subdued at around $36.16.
A falling heavy crude price is nothing new — Brent values have conceded 43% since the year’s highs back in May, and are down a whopping 67% from the $115 per barrel recorded in summer 2014.
But today’s fresh downleg is significant in that it takes oil prices below the trough of $36.20 struck in the aftermath of the 2008/2009 banking crisis. Indeed, crude is now changing hands at prices not seen since the summer of 2004!
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Oil keeps on sinking
Given that the steady stream of bad news smacking the oil industry shows no signs of slowing, I believe investment in the likes of BP (LSE: BP) is a highly-precarious business.
Market sentiment has fallen off a cliff since trade cartel OPEC opted to increase its production ceiling to 31.5m barrels at the start of the month, thumbing its nose to those calling for cutbacks to tackle bloated global inventories. And group output looks poised to climb further, thanks to the removal of Western sanctions on Iran and expanding Iraqi production.
Indeed, Iraq’s oil minister Adel Abdul-Mahdi added fuel to the fire just yesterday by ruling out production cuts unless a unilateral agreement amongst the planet’s key producers can be agreed “OPEC is not the only producer or the only player,” Abdul-Mahdi said, adding that “we have to see what the decisions of others should be – Russia and the United States and other producers.”
Such an accord looks unlikely in the near-term as the global market share grab intensifies. And while China’s spluttering economy fails to hoover up excess material — and the strengthening US dollar adds a foreign pressure lever to demand — I would not bank on crude prices staging a robust recovery any time soon.
BP saw underlying replacement cost profit tank 40% between July and September, to $1.8bn, and the likelihood of sustained revenues pressure should keep the bottom line on the back foot, in my opinion.
Services plays under pressure
BP’s worrisome earnings outlook forced it into adopting additional cash-saving measures in October. The oil giant now plans to make $3bn-$5bn worth of extra divestments in 2016, and asset sales of $2bn-3bn are planned after that.
On top of this, BP’s organic capital expenditure will now clock in at $17bn- $19bn through to 2017, with a figure of $19bn for 2015, significantly down from a planned outlay of $24bn-$26bn made a year ago.
The London-based company is not alone in taking the axe to its cost base and reducing investment, creating a worrying outlook for engineering and support providers like Wood Group (LSE: WG). Indeed, the company commented last week that it expects “a prolonged period of challenging market conditions” to continue.
Wood Group today announced the acquisition of construction and oilfield services provider Kelchner, a move that bolsters the British company’s exposure to the US shale sector.
But until the oil market imbalance begin to show signs of recovery, I believe Wood Group — just like BP and the world’s other major fossil fuel producers — remains a risk too far for sensible investors.
