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Macroeconomic Risks For The Oil Industry


The global oil industry now appears to be in the early stages of a cyclical expansion which is likely to see prices rise over the next few years, slowly at first but then accelerating later.

Deep and long cycles in oil prices have been the defining characteristic of the industry since the 1860s (“Crude volatility: the history and the future of boom-bust oil prices”, McNally, 2017).

The boom-bust cycle which started in late 1998, with prices briefly below $10 per barrel, and was only briefly interrupted by the recession of 2008/09, ended in January 2016, with prices briefly below $28.

In the 18 months since then, the industry has returned to an expansion phase, with a gradual increase in prices and drilling activity, much of it centred on the shale plays of North America.

Most of the industry’s cyclical indicators (production, consumption, stocks, investment, employment, prices, costs) point to a sustained upswing in activity that is likely to continue in the short and medium term.

Expansion Phase

Forecasting future movements in oil prices will always be subject to an enormous amount of uncertainty owing to the complex and non-linear dynamics of the oil market and all its sub-systems.

“We’ve never been any good at predicting these cycles, neither when they occur nor their duration. We don’t spend a lot of time even trying,” Rex Tillerson observed in 2016, when he was still chief executive of Exxon.

“How the future is going to look, we take no particular view on it, other than to recognise that whatever it is today it will be different some time in the future, and after that it will be different again.”

Price predictions have proved a regular graveyard for the reputations of even the most skilled oil analysts.

But with the oil industry just emerging from the deepest slump in a generation, cyclical positioning strongly suggests that prices are more likely to move higher rather than lower in the next few years (

The industry’s costs, which have always been pro-cyclical, are also likely to rise as the slack carried over from the downturn is absorbed and the supply chain tightens.

The main uncertainty centres on how far and how fast oil prices and the industry’s costs will rise in the years ahead.

Experience suggests the expansion is often slow and faltering at first and then accelerates as inherited slack is used up, memories of the downturn fade and confidence improves.

Too Fast, Too Soon

The principal risk in the short term is that prices and drilling rise too far too quickly, overwhelming growth in consumption, and sending the industry back into a slump.

Something like this occurred in the first half of 2017, with private equity investors, shale producers and hedge funds all trying to anticipate a cyclical recovery and pushing drilling rates and oil prices too high.

The result has been an inevitable setback, with oil prices falling from their peak in February, rig counts apparently reaching a temporary plateau, and more cautious positioning from hedge fund managers.

The long-term cyclical recovery is likely to see more of these mini-cycles, as oil prices, capital investment, hedge fund positions and drilling expand unsustainably and then fall back.

The basic trajectory, however, should remain one of a long cyclical upswing over the next few years.

Business Cycle

The principal medium-term risk comes from the global economy, with the increasing probability of a recession in the advanced economies sometime before the end of the decade.

The current economic backdrop is exceptionally favourable for the oil industry, with a sustained expansion in business activity and a gradual acceleration in trade flows in most regions of the world.

But the major economies, like the oil industry, are subject to long and deep cycles in activity, which have an impact on oil demand and prices.

Unlike the oil industry cycle, which is in the early stages of expansion, the macroeconomic cycle in many of the advanced economies looks increasingly mature.

The U.S. economy has expanded for 98 months, since hitting a trough in June 2009, according to the National Bureau of Economic Research’s Business Cycle Dating Committee (

The cyclical business expansion is already the third longest on record and will become the longest if the economy is still expanding in July 2019, surpassing the long boom of the 1990s.

There is a lively debate among economists about whether business cycles die of natural causes (because of accumulating imbalances in investment, inventories and financial markets) or are murdered by policymakers to control inflation or as a result of policymaking errors.

Moreover, the expansion phase of business cycles seems to have been getting longer, perhaps because businesses are getting better at managing investment plans and inventories, or because policymakers have a better understanding of how the economy works.

Recession Risk

The current economic expansion was preceded by the deepest slump since the 1930s in the United States, so the economy started with more slack than usual, which may make the expansion sustainable for longer.

Nonetheless, the expansion in the United States and some other major economies is starting to look fairly mature, with low levels of unemployment, high business profits, and signs of frothiness in financial markets.

For the Federal Reserve and most other major central banks, the question is not whether to tighten monetary conditions, which remain very accommodative, but how soon and how aggressively.

It is not safe to project current economic and financial conditions unchanged into the future without recognising the economy is subject to almost as much cyclical variability as the oil industry itself.

So any medium term forecast for the oil industry must take into account the increasing probability of a slowdown if not a recession in the advanced economies towards the end of the decade.

It is an open question whether a cyclical downturn in the advanced economies would spill over into developing economies that now account for more than half of global oil demand.

But in an integrated global trading and financial system there is a strong likelihood a slowdown in the United States and other major economies would spread, magnifying the impact on the oil industry.

The challenge for the oil industry is that its own early or mid-stage cyclical expansion could coincide with the late-stage of the macroeconomic cycle in the advanced economies and a tightening of global credit conditions.

Risks from the macroeconomy are probably fairly limited in 2018, but will become progressively more important in 2019 and 2020 as the business cycle becomes increasingly mature.


16 Comments on "Macroeconomic Risks For The Oil Industry"

  1. peaktard on Sun, 6th Aug 2017 8:10 am 

    i have first hand experience canadians have a vast inferior complex. Canada is a vast frozen waste land but never heard of outside very small part of north america.

  2. Davy on Sun, 6th Aug 2017 8:28 am 

    “Nonetheless, the expansion in the United States and some other major economies is starting to look fairly mature, with low levels of unemployment, high business profits, and signs of frothiness in financial markets.”

    Lets redo this:

    Expansion in the United States and all other major economies is a hollow debt driven, central bank repressed, and wealth transfer event that is looking fairly mature. The maturity reflects polices with no future nor any precedence from the past to refer to. This in effect is uncharted dangerous waters. Low levels of unemployment are illusionary because a huge amount of working capable people are not even in the workforce or are under employed at part time work at very low wages. Business profits are hollow and reflect stock market shenanigans and yield seeking. This yield seeking would blow up if rates normalized and margins and other leverage evaporated. There is frothiness in the financial markets but not because of real productive forces. There are primarily Ponzi repression type forces perpetrated by central banks and other officially sanctioned moral hazards.

    We are setting on the precipice of disaster and everyone is now habituated to the status quo of average growth remaining. All decisions reflect this. Nowhere is there talk of a correction or sobriety for the economic dislocations caused by nearly 10 years of very dangerous credit growth. The exception being those trying to sell something like gold. Most bears have been squashed by years of failed warnings. Does this mean the warnings are not valid, wishful thinking of course. Our lives hang in the balance because so much can go wrong in a hugely complex, interconnect, and just in time world all wrapped up in over complexity. We are far too reliant on technology and far flung supply of most every essential. We act and think like this is all normal and that is the real danger. We are like deer in the headlights of an oncoming train.

  3. peaktard on Sun, 6th Aug 2017 9:30 am 

    good thing upper tards no longer sensoring me. i must’d offended siss somehow. he has direct line to upper tards

  4. Cloggie on Sun, 6th Aug 2017 10:38 am 

    Military coup going on in Venezuela as we speak:

  5. MASTERMIND on Sun, 6th Aug 2017 2:35 pm 

    Where is that little shit talking small pecker Asian barbarian metck1?

  6. onlooker on Sun, 6th Aug 2017 4:20 pm 

    military coup orchestrated by US?

  7. bobinget on Sun, 6th Aug 2017 6:24 pm 

    Russian oil giant lends support to Venezuela oil company

    MOSCOW (Bloomberg) — Russia’s largest oil company disclosed another advance payment to Venezuela’s state producer after the U.S. sanctioned President Nicolas Maduro on Monday.

    Rosneft PJSC paid $1.02 billion to Petroleos de Venezuela SA in April for future crude supplies, the state-run Russian producer said in an earnings statement on Friday. That follows advance payments of about $1.5 billion in 2016 and comes a day after Rosneft CEO Igor Sechin pledged to stick with investment plans in the crisis-torn Latin American nation.

    The South American country became Rosneft’s largest source of crude outside Russia through deals with late President Hugo Chavez and after it acquired shares in Venezuelan producers, led by PDVSA, as part of its purchase of TNK-BP in 2013. Bets on a Venezuela default are climbing as political turmoil in the oil-dependent nation compounds a crude price crash and declining production.

    “This is an indirect way of providing some financial aid to PDVSA,” according to Ovanes Oganisian, a strategist at MidLincoln Research, a consulting firm in Moscow. “PDVSA bonds are trading now with yields indicating a very solid possibility of default.”

    The U.S., the biggest buyer of Venezuelan crude, sanctioned Maduro after he held elections on the weekend for a new assembly that will rewrite the constitution. The socialist state is said to be working on a Plan B to find markets for its oil if the White House ratchets up the punitive measures and bans imports.

    Debt challenge

    Rosneft holds a 49.9% stake in PDVSA’s U.S. subsidiary, Citgo, as collateral for the $1.5-billion loan last year. Several U.S. lawmakers have asked the Treasury Department to investigate the matter, saying it could have national security implications if Rosneft gains control over Citgo.

    The prepayment by Rosneft probably won’t resolve the challenge PDVSA faces in repaying its debt, according to Alexander Griaznov, a Moscow-based credit analyst at S&P Global Ratings.

    “There is no immediate impact on PDVSA, as the company still faces very material liquidity challenges under current oil prices,” Griaznov said. “PDVSA already did a distressed exchange last year, which constitutes a default under our criteria, and we think there is a high likelihood of similar transaction going forward.”

    Fitch Ratings Ltd. has said a default of PDVSA’s debt is “probable,” citing lower output, limp oil prices and weak liquidity. The state oil company sent a letter dated July 31 asking bond investors for a temporary waiver from financial reporting requirements because it can’t complete the documents on time.

  8. bobinget on Sun, 6th Aug 2017 6:29 pm 

    Rather then express my own ‘opinion’ on the fast moving Venezuelan situation I’ll restrict posts to news service proctored events in progress.

  9. onlooker on Sun, 6th Aug 2017 6:45 pm 

    Looks like the the military rebellion has been crushed. Beyond favoring the current Maduro government who does this benefit or harm?

  10. Anonymous on Sun, 6th Aug 2017 7:19 pm 

    Interesting to see Roger Blanchard stick his head up at latest POB post (in comments). This is the guy who predicted the Eagle Ford would peak at 600,000 bpd (and that was without a price crash).

    Here is his old Eagle Ford post.

    There is a huge tendency of you peakers to make prediction in one direction. And you never learn or address the old bad predictions. This is not scientific. (Really scares me Blanchard is a chemistry teacher.)

  11. Sissyfuss on Sun, 6th Aug 2017 8:39 pm 

    You haven’t offended me,PT. You just add to my confusion. And the upper tards say hi.

  12. GregT on Sun, 6th Aug 2017 8:42 pm 

    “Beyond favoring the current Maduro government who does this benefit or harm?”

    Follow the money onlooker. It’s always about the money.

  13. rockman on Sun, 6th Aug 2017 9:45 pm 

    “…saying it could have national security implications if Rosneft gains control over Citgo.” Complete bullsh*t: Total US Citgo refining capacity represents only 4% of US refining capacity. If it completely disappeared tomorrow it wouldn’t be noticed: remember we already export 25% of the refinery products we produce in the US. If our economy isn’t damaged by losing 25% I doubt 4% would be a problem.

    Also let’s think: why would the Russians shut down a revenue stream that they’ve invested $billions in? Statements like that is just an effort by the author to give his words some relevance. When you know the numbers that effort appears childish.

  14. rockman on Sun, 6th Aug 2017 10:10 pm 

    But on to the main issue: the boom/bust cycle. I didn’t see any indication the author understands geology or the E&P business. More specifically: the continuously declining number of viable drilling objectives at a certain price. Even at $100/bbl (that led to the surge in US production) eventually activity would decline even if that price held. What we always come back to: a finite resource.

    Yes: after every oil patch bust we recovered when oil price returned to a level that allowed drilling to continue. But in general that has never allow the overall decline in US production to change its trend.

    Until prices reached $90+/bbl and held there long enough for a significant increase in oil production to develop. And if oil returns to $90+/bbl again there will be another surge in drilling. But remember: many thousands of the better wells have already been drilled. And eventually the many viable locations in the Permian Basin at the high price will eventually be depleted. But probably not until the high oil price inflict enough damage to the US economy to knock oil prices and drilling activity down.

    And at that point in time there may still be many locations left to drill in the PB and elsewhere in the next boom when prices again vet high enough. But there will be fewer locations left to drill since many were drilled in the previous future boom.

    That’s the really important MACRO aspect of the petroleum business: some companies make cars, computers, wijets, etc. The petroleum industry doesn’t MAKE oil and NG: we just find what Mother Earth made millions of years ago. And She ain’t making more in a time frame meaningful for humans. LOL.

  15. Kenz300 on Mon, 7th Aug 2017 1:36 pm 

    Long term NEW investments in oil production are a bad investment. The future is a world using less fossil fuels.
    Look how fast investors lost their shirts by investing in coal.
    Invest in the future not the past if you want to make money.

  16. rockman on Mon, 7th Aug 2017 2:10 pm 

    “Long term NEW investments in oil production are a bad investment.”. Long term??? There really aren’t many such projects left. Shale wells peter out to insignificant levels in 4 or 5 years. Deep Water fields in 5 to 8 years.

    That’s the basic problem: there’s almost no long term NEW investments in oil production left in the world compared to what we had 30 to 50 years ago.

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