Investors hoping for an improvement in the energy sector in 2016 are already holding their heads in dismay as crude prices continue their relentless slide lower.
The Brent benchmark careered to fresh 11-year troughs around $32.16 per barrel on Thursday, prompted by collapsing Chinese stocks and fresh swathes of poor manufacturing data from the country. Indeed, December manufacturing PMI numbers came in at 49.7, representing the fifth successive month of contraction.
Crude prices have tipped 20% lower in the past month alone, taking total losses over the past 18 months — when price erosion first set in around $115 per barrel — to a whopping 72%!
And I believe the worst could be far from over, a terrifying prospect for major producers like BP (LSE: BP) and Premier Oil (LSE: PMO).
Supply discord set to continue
As well as the likelihood of more bearish data from the world’s second-largest crude importer, a backcloth of surging supply levels is not likely to subside any time soon, either.
The brief uptick in crude values last spring coincided with a steady reduction in the number of US shale rigs in operation. Trade experts Baker Hughes announced today that an average of 714 rigs were up and running in December, down from 760 the previous month and versus 1,882 just a year ago.
Still, these numbers can be considered misleading as improving operational efficiencies — combined with rising flows from the country’s most productive oilfields — keeps sending total North American output higher.
Indeed, the US Energy Information Administration announced just today that crude production advanced by 17,000 barrels per day in the week to January 1st, to 9.2 million barrels per day.
And fresh political strife in the Middle East also threatens to keep oil prices locked on a downward trajectory. Friction in the region has traditionally provided ‘black gold’ prices with strong support, naturally. But the current stand-off between Saudi Arabia and Iran means that a much-needed OPEC agreement to reduce production is as far away as ever.
Considering that global inventories are already at bursting point — numbers from the US this week showed domestic gasoline inventories rise at their fastest pace since 1993 — production needs to start heading seriously southwards to ease market fears.
Services specialists on the rocks
And as producer profits consequently head through the floor — BP saw its bottom line erode 40% between July and September, while Premier Oil swung to a losses of $214.7m in January-June from profits of $50.4m a year earlier — the industry’s major players are all slashing operational budgets to conserve cash and ride out the storm.
As such, the outlook for support services plays like Hunting (LSE: HTG) is equally perilous, in my opinion. The engineering specialist advised in November that profit from continuing operations is likely to fall by around nine-tenths in 2015 due to deferred or cancelled capital expenditure programmes.
And as the crude price collapse seemingly has plenty more left in the tank, I do not expect earnings to rebound at BP or Premier Oil — or indeed at services providers such as Hunting — any time soon.
