Green shoots and the price of oil

Malcolm Latarche
Malcolm Latarche

19 February 2016


The early weeks of 2016 have generally been like the depths of mid-winter gloomy and unpromising. This week however, some analysts are predicting that things are beginning to improve. The Baltic Dry Index has crept above 300 again and crude oil prices have gained around 25% from the lows reached in the third week of January. “5% sounds an awful lot but the $7 it represents would have been recorded as a movement of just around 5-6% from the highs of 2014. More ‘good’ news on the crude front was reported as Russia and Saudi Arabia along with a few other oil producing states agreed to freeze oil production at current levels. Scrapping is predicted to increase to a level not seen in recent years with around 40mdwr being predicted to be removed from the bulk sector alone and orders for new vessels being delayed so as to help reduce the burden of excess capacity. All good signs and maybe they are the famous green shoots of recovery but there are other voices who suggest that the road ahead is still unclear. There are still economic analysts who say that an oil price of below $20 is on the cards for later this year and while owners may be determine to scrap vessels, will they find buyers willing to offer the prices they want while new steel prices stay at the levels they are? Returning to the question of oil prices, an interesting article was to be found in Reuters earlier this week. Quoting a report from Deloitte, the article said that around a third of oil producers risked slipping into bankruptcy this year. The report was based on a review of more than 500 publicly traded oil and natural gas exploration and production companies across the globe and apparently those most at risk have more than $150 billion in debt. While attention was focussed on the financial problems the report also included the surprising fact that 95% of oil producers can produce crude for less than $15 per barrel. In 2014 the figure was 65% of producers. Clearly the enforced need to cut costs has produced some results but if the break-even price for oil is really under $15 per barrel then the argument that oil should really be valued at $60 or more is one that lacks a little credibility.