Oil prices briefly dipped below $30 per barrel this week as the depressed market continues. Market watchers seemed to be competing with each other to see who could publish the lowest prediction for oil prices, with Standard Chartered raising the possibility of $10 oil. It wasn’t too long ago that sub-$30 oil sounded ridiculous, so nobody can predict where the true bottom will be. The only thing that everyone knows is that today’s prices are unsustainably low since a large portion of global oil production is not profitable right now. The big question is when we will hit bottom.
The on-going crash in oil markets led to Wood Mackenzie’s much-publicized figure that $380 billion worth of oil projects have been cancelled since 2014. The totality of cancellations will result in nearly 3 million barrels of oil production that will not come online over the next decade. The markets have yet to grasp the ramifications of such massive cut backs, but the world could find itself dearly short of supply in the coming years given the dramatic pullback in exploration. For now, everyone is focused on the near-term.
Bond prices for embattled energy companies are rapidly deteriorating. The Wall Street Journal reported that bonds for WPX Energy (NYSE: WPX) and Oasis Petroleum (NYSE: OAS) plummeted on Thursday, with each losing about 12 percent of their value. Oasis’ bonds with a 2019 maturity date are trading at just 53 cents on the dollar while WPX’s bonds maturing in 2023 are trading at just 65.5 cents on the dollar.
The current market turmoil has created a once in a generation opportunity for savvy energy investors.
Whilst the mainstream media prints scare stories of oil prices falling through the floor smart investors are setting up their next winning oil plays.
Cheniere Energy (NYSE: LNG) was set to ship the first LNG cargo from U.S. shores this month, but the company has hit a snag. The Sabine Pass export terminal will delay that inaugural shipment until February or March over “instrumentation issues.” The setback is a minor one for an $18 billion facility.
More worryingly for Cheniere and its peers is the fact that a tidal wave of liquefaction capacity is coming online around the world this year and next, and LNG spot prices have crashed. Just a few days ago ConocoPhillips (NYSE: COP)announced that it had shipped the first cargo from its Australia Pacific LNG facility, exporting natural gas extracted from coal seams. Chevron (NYSE: CVX) announced on January 15 its intention to bring its massive Gorgon LNG project – a $54 billion project – online early this year. Gorgon is an elaborate LNG export terminal off the western coast of Australia, a facility that has suffered from huge delays cost overruns, but is finally nearing completion. Chevron is the operator on the Gorgon LNG project, but its partners include ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), as well as several energy companies from Japan.
In addition to ConocoPhillips and Chevron, other LNG exporters are slated to bring export terminals online this year. Oil markets have suffered a supply-driven bust, but the problems of too much capacity are about to hit the LNG markets even harder.
While the oil and gas industry suffers, the global market for clean energy is doing very well. This week Bloomberg New Energy Finance published 2015 figures for solar and wind, revealing another record year for clean energy investment. Globally, an estimated $329 billion was invested in clean energy last year, up another 4 per cent from 2014. Wind and solar saw 64 GW and 57 GW of new installations, respectively, which are record highs. The achievements are all the more impressive since they took place during a period of extremely cheap fossil fuels. “These figures are a stunning riposte to all those who expected clean energy investment to stall on falling oil and gas prices. They highlight the improving cost-competitiveness of solar and wind power,” BNEF’s chairman Michael Liebreich said in a statement.