2018 Oil Market Overview
The last time I wrote an article on the state of the oil and gas industry and why oil and gas young professionals, fresh grads and students should not give up their dreams of joining and building a career path in the oil and gas industry, was back then in March 2017, during that time oil price was hovering around $50 per barrel. A lot of things have changed since then, and fortunately in a positive way.
Oil price is now fluctuating above $60 per barrel, around 20 percent up from the same time a year ago. OPEC and non-OPEC oil producers continue to support oil prices through their oil output cut deal. The global oil surplus is shrinking due to a stronger-than-expected European and U.S. demand growth, as well as production declines in OPEC and non-OPEC countries. U.S. crude oil stockpiles are down from the levels it was at a year ago. All these positive sentiments have helped move the market cycle emotion from hope and relief into optimism, building traders and investors’ confidence that the oil market is moving in the right direction.
This improvement in the overall oil market environment was not only in terms of improving market cycle emotion, but it is also shown in terms of the improvement in the financial performance of major oil and gas operating and services companies which was clearly shown in their full year 2017 financial reports as most of the companies reported a strong financial performance and higher profits particularly during fourth quarter 20017 as well as the full year of 2017.
While the aforementioned positive market sentiments have continued to drive oil prices up -allowing Brent crude oil price to touch base with $70 per barrel for the first time in three years back in January 2018, it clearly failed to maintain oil price at around that level. And despite the considerable support oil prices are getting from OPEC/non-OPEC oil producers led by Saudi Arabia and Russia to push the oil prices higher, oil seems to face a high resistance to break out of $70/bbl level and maintain this level for a longer time. This boils down to the risks associated with higher oil prices. And this is due to the fact that as oil price goes higher, drilling activities and crude oil supply increase posing a threat to the supply and demand balance which OPEC/non-OPEC oil producers are trying to achieve through their oil output cut deal.
Taking 2017/2018 oil price movement and how U.S. crude oil production and drilling activities have reacted to this oil price movement as an example, we can clearly see the risks to oil market stability that are associated with higher oil prices.
In January 2017, when oil price was roughly around $50/bbl, U.S. crude oil production was approximately 8.9 million barrel per day. Since then and up until today, oil price has went up by roughly 20 percent, mostly driven by OPEC/non-OPEC oil output cut aimed artificially balancing crude oil supply and demand and the resulting positive sentiments. In a similar trend, U.S. crude oil production has increased by approximately 1.4 million barrel per day from 8.9 million in January 2017 to 10.3 million bbl/day as of today according to the Energy Information Administration. Due to the fast growth in U.S. crude oil production and the consecutive weekly increase in U.S. rig count during that period, oil price reversed direction in January 2018 and fell back to around $60/bbl. This example illustrates the risks associated with higher oil prices that could eventually lead to a collapse in oil price as it resumes the glut in the oil market.
Brent Crude Oil Price 2017/2018
Moving forward, and given these market conditions, the upward movement of oil price will continue to be limited by the potential growth in crude oil production and ramp up of drilling activities particularly in the United States, and Canada. While there is a considerable support to oil price from OPEC/non-OPEC oil output cut deal, which will continue to prevent oil price from falling below $50/bbl, it is highly unlikely that this support will drive oil price above $70/bbl and maintain it around that level for a longer period of time.
It is also highly unlikely that OPEC/non-OPEC oil producers will further cut their oil output to balance the oil supply and demand while they watch U.S. shale oil producers’ output growing, and with it grows a threat to their oil market share. In fact, I expect OPEC/non-OPEC oil producers to scale back their oil output cut level.
Having said that, oil price is expected to be in a range between $55/bbl and $73/bbl throughout 2018 to early 2019. The fluctuation of oil price around this range will highly depend on how OPEC/non-OPEC members will react to the continuous growth in U.S. shale oil production. We could see oil falling to around $55/bbl if OPEC/non-OPEC producers begin to show concerns over growth in U.S. oil output as they are currently in a wait and watch mode. But again, it is highly unlikely that they will let the oil price crash again and waste two years of effort for nothing. They will definitely show some support to oil price just to keep the price between $50/bbl and $60/bbl.
An Advice for Fresh Grads and Young Professionals
If you have read the above oil market overview, it should be clear for you by now that while the oil market conditions have improved, uncertainty and slow and cautious momentum are still here to stay for a while. Oil companies will continue to focus on efficiency and cost reduction, trying to maintain the results of cost cutting measures they have achieve during the three years of downturn and probably drive it further. Companies will also focus on maintaining profitability, delivering cash flow at low cost, and delivering value to stakeholders. That means more focus on longer term growth, and an increase in spending which will be mainly focused on increasing production, and getting a head start with projects that have been put on hold in the past few years.
What does that means for fresh grads and young professionals who are trying to get into the oil industry? It definitely means a better chance of getting a job than in the last three years, but it also means that it is still not going to be an easy task. Competition still at its peak, a high number of candidates are competing for low number of job openings. Recruitment activities are picking up, but the momentum is still slow and most of the job openings are for highly skilled candidates.
This means if you are a fresh grad, or a young professional, you should not just apply for a job and wait for your luck. What you must do instead is to work harder than everyone around you. You should search for the opportunity yourself, don’t wait for it to happen. Get in touch with people working in oil and gas companies and try to find out what are the current available opportunities. Build your network and utilize it to either provide you with opportunities or use it as a link to available opportunities. At this time in the oil market, people are getting hired by who they know or who knows them than by traditional job application.
