In early January, oil prices dipped below $50 bbl., with some predicting a drop below $40. The problem continues to be that no one wants to blink.
As I wrote last month, everyone looks to OPEC, and specifically Saudi Arabia, expecting action to address the oil glut. But why should they? They have a strong historic precedent against cutting oil supply. The crises of the 1970s began when Saudi restricted production and exports, a move that backfired badly. The Saudi’s lost market share worldwide. To cut production now to raise prices would put Saudi and OPEC market share at substantial risk again. Therefore, unless the crisis worsens considerably, it is unlikely that OPEC will take unilateral action to restrict output any time soon.
As a result, U.S. shale development is faltering. A recent Genscape (a data and market analysis firm) projection forecasts that the U.S. oil rig count will fall below 1,100 for the first time in three years, landing at 1,073 in August. Overall, the rig count will drop by nearly 600 rigs in the next six months, the company said. That figure may be conservative.
Most pundits say that the offshore market, in particular the deepwater market, is not in as much danger. They point to longer contracts and high-dollar commitments. There is some logic in this, in the short term. Long term, however, things could head south. When earnings are impacted, almost nothing is sacred, including contracts. While drilling and development obligations will mostly be met offshore, service contracts will surely be revised. As a service company, how can you say no to your customer base on which your continued existence depends? The answer is, you can’t.
The current scenario has resulted in a decrease in offshore service vessel day rates. The longer the oil price crisis lasts the worse the OSV day rate and utilization decline will be.
