Schlumberger: Global oil oversupply to end by 4Q
OREANDA-NEWS. April 25, 2016. Global oil oversupply is "expected to shrink to almost zero" by the fourth quarter as producers sharply pullback drilling activities amid weak crude prices, according to oilfield services provider Schlumberger.
Non-Opec output, outside of North America, "is now in full decline," Schlumberger chief executive Paal Kibsgaard said in an earnings call today. "The oil market is in the process of balancing."
Non-Opec output is expected to fall by 1mn b/d year-on-year, led by the US, Mexico, Colombia, Brazil, the UK and China. This will increase demand for Opec crude, or the call on Opec crude, by 1.8mn b/d from today's levels by the fourth quarter.
The prospect of higher supplies from Iran, resilient US shale oil output and elevated exports from Russia and Saudi Arabia pushed benchmark crude prices below \\$30/bl in the first quarter, as the demand growth outlook from top consumer China remained bleak. As the market drop that began in mid-2014 continued, majors, including ExxonMobil and Chevron, and independents including Continental Resources, Anadarko and Apache all made steep cuts to their spending plans to preserve cash.
But those sharp cuts mean that "there are limited sources of short-term supply that can be brought to the market," once the current market overhang gets soaked up, Kibsgaard said. Next year will see a further drawdown of global stockpiles, spare Opec capacity being brought to the market and North American producers bringing online their inventory of drilled but uncompleted (DUC) wells.
"The sources of additional production for 2017 is limited to these items," Kibsgaard said. "We will need significant increases in E&P (exploration and production) investment. There is no way you can get around that."
Schlumberger warned that the second quarter "is going to be another very tough quarter" because of the spillover in the significant drop in activity from the first three months of the year. It will also have to deal with the pullback in operations in Venezuela, announced earlier in the month, to bring activity in line with cash flow. In certain basins in North America and in some markets overseas, activity level has fallen to "critical mass type of levels," which is making the company consider "what the startup cost again would be in the event we have to shut everything down," Kibsgaard said.
The oilfield services company cut an additional 2,000 employees in the first quarter, bringing its total down from 120,000 at the end of 2014 to 93,000. It also shed about 5,500 contract workers, taking the total for the quarter close to 8,000, he said. The company is offering leave of up 12 months to its senior employees at half their annual salary. Of that, 20pc is paid upfront and the remaining 30pc when they are called back in batches, in the coming 12 to 18 months.
"So that's a key part of how we preserve some of our core operational expertise," he said.
The company yesterday reported that profit fell by nearly 50pc to \\$501mn in the first quarter from \\$975mn a year earlier.