Last week was IHS CERAWeek, when everyone who is anyone in the oil business rolls into Houston to pontificate on what is going to happen to the industry.
At that conference, the oil world was shocked by statements from Ali Al-Naimi, Saudi Arabia’s oil minister.
“There is no sense in wasting our time seeking production cuts. They will not happen,” Al-Naimi said. “What will happen is we will all as major producers find it easy to freeze production, let demand rise and let some inefficient supplies decline, and eventually the market will balance.”
Here was the Saudi oil minister promoting the agreement engineered between Saudi, Russia, Qatar, Oman and Venezuela to freeze their output at January levels in order to help oil prices recover. The problem is that Iran, who is now free to boost its oil output with the lifting of Western economic sanctions, wants to increase its output and regain the market share it lost over the past four years.
Following Al-Naimi’s comments, oil prices dropped by 5% from their recent high. They worked higher during the balance of the week as forecasters called for falling U.S. shale output. Other conference speakers declared that the oil industry could not continue drilling given $30 a barrel oil prices, which would lead to a self-correction between too much supply and not enough demand. Still others talked about $50 bbl. oil prices as being likely by the end of 2016.
Contributing to the recovery optimism were the declarations by the heads of a number of oil companies that they have become disciplined about spending. Moreover, they vowed to be disciplined in responding to the next oil price up-cycle, which they are convinced will be starting soon. Many of those oil company execs espousing spending discipline where the same ones who just chopped their organizations to cut costs and bring cash outflows closer to cash inflows.
Having lived through multiple oil industry cycles, we understand that managers know how to cut to survive drops in commodity prices. We are also convinced that these same managers have a difficult time handling the cycle’s good times. Why is that? It may be in response to peer pressure, including investor demands. The boom and bust history of the oil business has unfortunately claimed many lives and careers. Surviving managers are hailed for their “brilliance,” which in reality is often more luck than smarts.
We hope in the future that more oil execs would heed the advice of 80-year-old Al-Naimi, who joined national oil company Saudi Aramco as an office boy and rose through the ranks to become the company’s first non-American CEO and is now the kingdom’s oil minister. “We should allow markets to work, but we must remain vigilant, we need to work to understand new market dynamics,” he admonished the audience.
The oil business may be cyclical, but the next industry cycle will differ from those past. Good managers will focus on the differences and adjust strategies accordingly – hopefully to the benefit of employees and investors.
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The views and opinions expressed in this blog are the author's and not necessarily those of WorkBoat.
