Late in my blog earlier this month I referred to an emerging rebound in the offshore energy market. I still believe that a rebound is on the horizon, but recent events, however, have pushed it back a bit.
Why? Two primary factors are in play. The first is Saudi Arabia’s determination to produce as much oil as possible to make up for shortages due to the looming Iranian sanctions. The Trump administration re-imposed the first tranche of sanctions on Iran earlier this year. A second round of sanctions, which were due to take effect in October, will target Iran’s energy sector. The move by Saudi Arabia will negate any oil price increase due to the absence of Iranian crude on the international market because of the sanctions.
Second, stockpiles of U.S. crude are increasing due to maintenance season and lower exports, creating a negative impact on oil prices. U.S. crude inventories rose by 3.7 million bbls. the week of Oct. 22. The result, as of Oct. 24, is a 4.3% fall in Brent prices and a 3% fall in WTI crude, to under $70 bbl. That puts a dent in the recovery. But “on the horizon” is where it could get interesting.
In response to the current sanctions, Iran has threatened to block the Strait of Hormuz that connects the Persian Gulf to the Gulf of Oman. The route provides the only sea passage for crude from Kuwait, Bahrain, Iran, Iraq and the United Arab Emirates to the Indian Ocean. According to the U.S. Energy Information Administration, an average of 18.5 million bbls. of oil per day passed through the Strait in 2016, a 9% increase from the previous year. This is estimated to be more than 35% of the world’s seaborne oil shipments and 20% of oil traded worldwide.
The Strait of Hormuz is also the route for nearly all liquefied natural gas (LNG) from lead exporter Qatar. It is likely that scenario will be avoided. But should it occur, oil prices, at least for a while, would see the $100-bbl. level or above again.
Until the time when the landscape becomes a bit more settled, and there are a few signs that it may be happening, it is difficult to predict where the offshore market is heading in the near term.
One sign that things may be settling a bit is the recent merger of offshore drillers Ensco and the Rowan Companies scheduled for 2019 and analyzed by G. Allen Brooks in a recent WorkBoat blog.
As the market evolves, I believe the nascent rebound will develop and day rates will climb, but I would not suggest jumping in yet with both feet.