Are There More Troubles Ahead For The Oil & Gas Sector?

Aramco, Saudi Arabia’s main oil and gas company, commented recently that it has no plans to reduce its oil production levels even as the world sees crude oil prices at their lowest since 2010.

According to an International Business Times report on the Aramco comments, the company’s strategy of continuing with its current levels of oil production, even as the price of oil has fallen hard ( from a high of US$115 per barrel in 2014 to a low of about US$45 this year), has helped Saudi Arabia win back market share from US producers.

In recent years, oil producers in the US have been rapidly increasing their production with the help of new extraction technologies. From 2009 to 2014, an additional 5 million or so barrels of oil a day were produced. Of that daily count, 3.3 million barrels  were contributed by US producers. That’s nearly two-thirds of the global growth in oil production.

Now with oil prices at less than half the levels they were a year ago, many upstream producers in the US are feeling the heat. Although some of the better wells are able to break even with the price of oil around US$30 per barrel, some have production costs that require an oil price of as high as US$70 per barrel.

Officials from Saudi Arabia are commenting that they will not be the ones cutting down production to stabilize oil prices. This would mean that the market would have to weed out weaker producers (those with high costs of production) in order for global supply and demand forces for oil to balance out.

Some US producers are already cutting down on their production of oil. According to a forecast by the US Energy Information Administration (EIA), US oil production might drop by 10% or more by the middle of 2016.

What does this mean for investors?

Any decrease in oil production will likely not happen overnight. It will take time for the market to balance out the supply and demand for the fuel.

This means that we must be prepared for a longer recovery period for many oil and gas-related businesses. Given that the revenues and profits of many oil and gas services providers in Singapore ultimately depend on the price of oil, I don’t think that investors can expect companies such as Ezra Holdings Limited (SGX: 5DN) and Ezion (SGX: 5ME) to see a sharp recovery in their business – and by extension, their share prices – anytime soon.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Writer Stanley Lim doesn’t own shares in any companies mentioned.