Oil Price Scenario for 2017: The Good, The Bad, and the Ugly

The fortunes of the oil market are closely bound with those of the automation market.  The 2014 drop in oil prices had a withering impact on oil the profits of the large integrated oil companies and the smaller owner/operators alike.  According to a recent article in the New York Times, the US has lost about half its oil workforce since the price drop.  Prices remain volatile.  At the time I wrote this, Brent Crude was close to $56 bbl., but prices have been volatile over the past few months, and we have seen some large fluctuations.  Since the beginning of December, however, WTI has consistently been above $50 bbl., and ARC expects that we will see at least a moderate recovery in oil prices in the first half of 2017. 

WTI Price History: Jan 2016 to Present (Source: Bloomberg Markets)

Most of the financial analyst firms are predicting mid-$50 bbl. oil for 2017, with the recovery accelerating in the latter half of 2017.  This is fairly consistent with ARC’s assumptions about the oil market that we developed in the latter half of 2016 to guide our automation market forecasts. Bank of America/Merrill Lynch, for example, is forecasting “WTI crude oil at $59 a barrel and Brent to average $61 a barrel” in 2017.  The OPEC production cut announcement in December was enough to cause Goldman Sachs to revise its forecast for oil prices in the second quarter of 2017 to $57.50 a barrel from $55 a barrel. The B of A forecast is generally regarded to be pretty bullish, while Goldman Sachs scenario is a little more conservative. 

Upstream projects are continuing to improve somewhat, but we haven’t yet reached a full return to growth in the upstream sector.  The constraint in supply is driving prices up, but there are many sources of potential overcapacity that might arise from these price increases.  Many shale producers went out of business, but there are many that can boost their production quickly to capitalize on rising prices.  These include EOG Resources and Devon Energy.  Statoil recently announced that it plans to drill 30 exploratory wells in 2017, an increase of around 30 percent over 2016.  Hopefully we can achieve the balance between price and capacity needed to drive the industry in a positive direction.

Rising oil prices mean more capital expenditures in the upstream sector, but the downstream sector has benefitted from low feedstock prices and good margins, but that is also starting to change.  Many refineries ran hard with no time for shutdowns during this time of higher profitability, but now they must undertake maintenance activities that have been deferred for some time.  This recent article in Hydrocarbon Processing outlines some of the challenges faced by owner operators in finding qualified labor and human resources to get all these projects done.