It’s the oil market, Jim, but not as we know it…

Whether one likes it, or not, the price of crude oil (which is truly a global market, even if there are multiple segments, benchmarks and regions) still matters a great deal to the functioning of the global economy.

The ructions of the past 2 to 3 years in terms of pricing, supply, alternative technologies and the debates about the advent of the Anthropocene (and what has caused it) mean that we may be entering a new paradigm- with just the modest problem that no-one can really be sure what it will be!

A key question is whether one can any longer be comfortable that past is prologue. Historically (and that is really a period of no more than 150 years), the industry has been one of “boom and bust”, while the only state in the world named after a family or clan (Saudi Arabia) would not exist were it not for oil. In that time, various cartels, from the Standard Oil Trust to OPEC have tried to control the volatility of the market, usually with only short-term success, while control of abundant, flexible and low-cost oil supplies is the archetypal economic and political weapon.

And yet, recent events have begun to create the possibility that the old system in which Saudi Arabia was the “swing producer” is crumbling. “Turning on the taps” to force the price down and inflict unbearable pain on those who have the temerity to challenge the old order has patently not worked, running the risk of further destabilizing an already benighted Middle East. Although the last 2 years have seen scores of bankruptcies and restructurings in the North American E&P and oil services sectors, there has been remarkably little change in the levels of US and Canadian crude oil production considering the scale of price declines and volatility, because the “pain” has caused an habitually entrepreneurial sector to re-order its productivity across the US tight oil production base. One remarkable result is that the amount of oil produced per operating rig has quadrupled in 5 years, while average Finding and Development costs (F&D) have been driven down relentlessly. It is no wonder, therefore, that even at current crude oil price levels around USD 50/barrel, there is what can only be called a bidding frenzy for prospective acreage going on in the Permian Basin of the US.

Of course, it could all end in yet more tears. The dynamics of supply and demand in the oil market are such that the future oil price implied in the forward curve is invariably wrong (and sometimes significantly), while any period of relative stability in prices lulls market participants into thinking that its historic levels of volatility are just that- usually with very bad outcomes for those on the wrong side of the trade.

At Awbury, we have considerable experience in understanding, analyzing and managing the risks posed by this crucial sector, and in providing a range of direct and contingent protection solutions to our clients, as they seek to provide some certainty for their business models.

Therefore, we are always interested in discussing and helping to solve the conundrum which the oil market continues to present.

The Awbury Team


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