Get used to ‘new normal’ of oil at US$40-US$50 a barrel

KUALA LUMPUR: The global oil market needs to adapt to the “new normal” of US$40 to US$50 ((RM161 to RM202) a barrel within the next five years with continued lacklustre in the upstream space, according to industry experts.
Bain & Company head of America Oil & Gas Practices Jorge Leis said this will be driven by tremendous supply of low-cost oil as well as excess supply from the Organisation of the Petroleum Exporting Countries (Opec) and Russia.
He noted that a potential slowdown in demand throughout the decade will also weigh on oil prices.
“We think that the depressed prices of US$50 is probably here to stay for a while,” he told a media roundtable on “Uncertainty in Global Oil and Gas Markets – What to Expect to 2020” here yesterday.
In the best-case scenario, oil prices are not expected to exceed US$85 a barrel, said Leis.
However, he said one should not have a bearish view on the “new normal” if compared with the average level for the past 20 years.
In addressing the protracted oil price rout, Leis noted that the oil and gas players have to adopt a transformation approach to their cost structure.
Bain is a management consulting firm that advises clients on strategy, operations, technology, organisation, private equity and mergers and acquisitions.
Bain head of Southeast Asia Oil and Gas Practices Dale Hardcastle said the Malaysian oil market is facing a challenging transition, which has a significant impact on investments.
Hence, he said this will prompt the consolidation of the industry to accumulate assets with competitiveness.
Meanwhile, Leis noted it has turned out to be more negative this year following the discussion with the oil and gas players, with most of the global major economies are seen to be slowing down.
“Due to internal and external issues including Brexit, we’ll probably be looking at the European Union slipping into stagnation and even a deeper recession.
“Then we see China, although not necessarily going into recession, but certainly continuing the downward in terms of growth rate,” he opined.
While concerns have mounted over the financial position of the oil and gas players, Hardcastle said their financials are much stronger compared with that during the global financial crisis in 2008.
“Nowadays, lenders are flexible and willing to find ways to work things out,” he said.
Nevertheless, he acknowleged that the worst is not over yet as investment pullbacks are expected to persist for some time.
Singapore’s oil field services firm Swiber Holdings Ltd has recently filed an application to wind-up the company after receiving letters of demand amounted to US$25.9 million from its creditors. It operates a fleet of 51 vessels.
For liquefied natural gas market, Leis is of the view that the rebalancing will only take place in 2022.
“Two years ago, all the build ups were earmarked for Asia, but probably not the case now because of the drop in prices,” he said, raising his concern whether Europe is able to absorb the excess supply.