Oil and Gas Firms Struggle Under Low Prices – 1/8/16

With the glut still growing, oil and gas related companies face tough times and no-win situations. For prices to stabilize production must drop but the companies that reign in output first are painting bull’s eyes on their backs as investors look for the companies that will buckle first under debts taken in more prosperous times. The depression in prices may be prolonged simply because the companies have no incentive to cut back and appear weak when they still have the option of holding on to the hope that the market will recover. However, with prices falling below $30 a barrel the time of reckoning may be upon the companies soon.

Fears of a slowdown in China continue to depress oil and gas prices. With people betting against the yuan, doubting the Chinese governments ability to handle the markets, and fearing that global growth would be dragged down by the slowdown of the¬†world’s 2nd largest economy. Routs in the Chinese stock market only slowed by automatic trading cutoffs from a circuit-breaker rule have continued unabated leading to pessimism about the future of the nation. With supply swamping demand, it may be up to the OPEC countries to make a change either by agreeing to reduce production or collapsing under the weight of budget deficits brought on by lost oil revenues.

OPEC for its part in the crisis has essentially abandoned output limits so far. As major oil producers burn through reserves, austerity measures might soon be the only option for those countries that had for so long relied on oil to fund government spending and social programs. Saudi Arabia, the biggest producer of OPEC players, has seen a flurry of activity in recent times as it competes for market share with shale-oil in the US and Russian oil in Europe, suggests an IPO for the state owned oil company Saudi Aramco, and comes into conflict with Iran with which it will soon be competing if sanctions on the oil producer are lifted as part of an upcoming nuclear deal.

Print Friendly, PDF & Email

Comments are closed.