Analysis More pain expected for China’s oil sector

Weak oil prices will continue to afflict mainland producers this year amid global oversupply after a strategy shift by the Opec oil-producers’ cartel to preserve market share rather than prices. As mainland producers respond with cuts to capital spending and operating costs, those supplying services to them are also likely to experience more pain. Analysts expect oil prices to remain weak in the first half of this year because it will take time for excess supply to be squeezed out. Producers won’t be economically compelled to shut down producing fields as long as oil prices can help offset their variable operating costs and some fixed costs. Producers will be busy reassessing the viability of their oil fields and will gradually shut down their highest-cost fields to preserve cash flows. During the first quarter, it is possible that WTI could break down further to US$50 a barrel RBC analysts “It will be a year of two halves,” a research report by Australian bank ANZ said of a commodities market generally in over-supply, in particular with regards to oil, coal and iron ore. “The first half will be weaker and more volatile, but the second half should improve as increased supply discipline and stabilising [demand] growth begins to emerge.” Royal Bank of Canada (RBC) cut its forecast for this year’s average West Texas Intermediate (WTI) crude oil benchmark by 25 per cent last month to US$65 a barrel, and that for next year by 13 per cent to US$74. ANZ’s analysts are also tipping US$65 this year, 30 per cent lower than last year’s average. The consensus forecast of analysts polled by Bloomberg for this year is US$72. The one-month crude oil future WTI benchmark closed in New York last year at US$53.27 a barrel, down 46 per cent year on year and 50 per cent lower than the year’s highest closing price of US$107.26 on June 20. “During the first quarter, it is possible that WTI could break down further to US$50 a barrel,” RBC’s analysts said in a research report. “The global oil market is undergoing a painful rebalancing act” following Opec’s November 27 decision to maintain its 30 million barrel-a-day output level. That decision will likely see Opec’s market share maintained at around 39 per cent until at least next year, forcing output cuts in non-Opec nations, notably from high-cost projects such as those that extract shale and tight oil in the United States and from oil sands in Canada. Expensive, unconventional methods are used to produce oil from such projects. Output growth in the US, which overtook Saudi Arabia last year as the world’s largest oil producer, is expected to fall by two-thirds in 2016 to 0.4 million barrels a day from 1.1 million barrels a day last year, RBC estimated. “We think US$60 a barrel will be the level at which fast-rising US [producers of oil from shale rock] will feel the pinch,” ANZ’s analysts said. “Although it will take six to 12 months for these supply cuts to become apparent … unconventional US and Canadian oil output will rise, but at a slower rate.” The RBC analysts expect oil prices to stage a sustained recovery in the second half of this year, with global demand growth forecast to pick up from 0.7 million barrels a day last year to 1.25 million barrels this year and next year, as they estimate that for every US$10 fall in oil prices, global economic growth would rise 0.2 to 0.3 percentage points. “In China, we believe lower oil prices are likely to overwhelm the positives of market reform and company-specific restructuring,” BNP Paribas analysts said in a research report. “We believe PetroChina’s mixed [private-public] ownership proposals face delays, while China Petroleum & Chemical’s (Sinopec) efforts to improve the performance of its marketing division is likely to take longer than expected, based on our in-depth investigation of its service stations.” CNOOC, which has no downstream oil refining and petrochemical operations, was the most exposed to oil price falls, and might have to book more write-downs on high-cost assets from its acquisition of Canada’s Nexen, they said. Sinopec was the most insulated, since lower oil prices would lower material costs and stimulate demand for its downstream fuel and chemical products. PetroChina shares lost 26 per cent from last year’s closing high in early September, while Sinopec shed 24 per cent and CNOOC tumbled 33 per cent. Companies supplying services to oil producers suffered even more, with shares of Anton Oilfield Services slumping 71 per cent from the year’s high, SPT Energy down by 72 per cent and state-backed China Oilfield Services losing 42 per cent. Industry consultancy Wood Mackenzie estimates that global oilfield services, equipment and infrastructure spending by producers will drop by US$170 billion, or 37 per cent this year if oil prices remain at US$60 a barrel.