More firms going under not necessarily bad for future

What goes up must come down and what goes down should slowly come back if not bouncing backing the near future. Oil prices caused havoc to many businesses when it was over US$100 per barrel. However, once it dropped below US$50 per barrel, all of a sudden, many businesses related to oil and gas started to shiver and some have scaled back or even closing down. The bad news continue to come in as oil prices are still at a level considered extremely low for many producers. It’s at US$29 per barrel (10th Feb 2016). According to a media report, about 150 oil and gas companies tracked by energy consultant IHS Inc would be the next ones to close down with huge oversupply and low prices.

Just days ago, Royal Dutch Shell announced that it will be selling its shares in Shell Refining Company in Malaysia to a unit of a private Chinese refiner for US$66.3 million (S$94.4 million). I think this is just one of the hundreds and thousands of deals coming up as oil & gas companies struggle to make ends meet and lots of ‘vultures’ with cash waiting to snap them up. Within the past 2 years oil prices has already dropped 70 percent because US shale producers boosted output and the Organisation of Petroleum Exporting Countries trying to drown the higher cost suppliers by producing even more. Even at current prices, there are no signs that OPEC will curb production.

Once many of these producers go bust, the production should start to go down. According to Goldman Sachs in January, “The global oil surplus that fuelled crude’s decline to a 12-year low will shift to a deficit as output falls and a new bull market begins before the year is out”

Before everyone think oil prices would rise to the levels of two years ago, lets understand some new facts. Due to low oil prices, many producers are getting even more efficient and according to IHS, some some producers in the Permian Basin in western Texas can break-even drilling oil at US$35 a barrel. Many months back, I read that the US shale oil producers would lose money with anything below US$50 per barrel. Now, it’s just US$35! As soon as production drops too much and prices start recovering, the supply would either push prices back down or at levels closer to what these producers can produce instead. I think this is good for many businesses but many governments would have to adjust their budgets to cater for these low oil prices which should continue for a long time.

Malaysia’s budget recalibration was based on oil prices of US$30 to US$35. It would have to go for another recalibration once oil prices touches US$25 a barrel. Fortunately, oil & gas now accounts for around 22 of the GDP and with even more push, Malaysia have no choice but to be even more diversified and perhaps stop relying on oil in the future. Think below 15 percent of GDP as a very good number. Seriously, I think it’s possible, as long as oil prices remain near to current levels. Be reminded, low oil prices affect all countries in the world and once majority of every country has adjusted, everything would be normalised with just the less efficient companies shutting down which is good for the economy anyway. Keep reading.

written on 11 Feb 2016

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