Sembi’s Synopsis of IP Week 2017

Amrik Sembi, Openlink’s Head of Liquid and Bulk Commodities in EMEA, details his thoughts on the main findings following IP Week, 21st to 23rd February in London.

Amrik Sembi, OpenLink’s Head of Liquid and Bulk Commodities in EMEA, details his thoughts on the main findings following IP Week, 21st to 23rd February in London.

Forget lower for longer, it’s now lower for life

The mood has shifted. We’re out of the downturn but $100 oil seems like a distant memory, one that doesn’t look set to return. An historic OPEC and non-OPEC production cut deal has seen high compliance, but the effect on pricing so far has been minimal. $50-60 looks like the corridor for the rest of the year, and it looks unlikely to stray beyond $45-70 in the near future, if ever.

The industry has changed. Firms now need to look elsewhere to manage their margins. At $100 a barrel, oil companies could afford to be relatively relaxed. At $50, such flexibility is a luxury no longer afforded to them – and they have to tighten the ship.

Middle Eastern changes

The traditional national oil companies in the Middle East are thinking differently. Many are looking to become international oil companies, and Saudi Aramco is looking at the biggest IPO the world has ever seen. One way in which they are acting more internationally is by taking a more stringent approach to their margin and efficiency.

However, efficiency is not the be all and end all. While it has allowed national Middle Eastern firms to start rivaling their Western rivals, success in one market does not automatically mean they will be successful in another. Headwinds remain for the Middle East and, considering China and Asia make up a big part of their customer base, a Trump trade deal in the region could make life difficult.

Immort-oil: Rumors of oil’s demise are greatly exaggerated

Renewables and electric vehicles (EVs) have been heralded by many as death knells for hydrocarbons, but the industry does not think so. By 2035, double the amount of cars will be on the road. EV uptake will increase, but there is nothing to say they will have the greater share of the market.

You can never discount a technological revolution that causes a massive shift, but that looks unlikely. The oil industry is a lot different to that of taxis, and it is unlikely an Uber will appear and uproot it in a few short years. After all, it will be a long time before Airlines and marine freight are electric. No one can decide which alternative is the future, meaning the future remains oil.

What’s more, we do not have to just think of hydrocarbons as fuels. Petrochemicals and plastics see no signs of diminished demand – quite the opposite.

Finally, we need to think in term of margins rather than the oil price. As automation, the IoT and manufacturing techniques such as 3D printing penetrate the oil industry, production costs could plummet. It is feasible that with ever greater efficiency oil could become more profitable than now even at a lower price. And don’t forget – reduced prices make it more difficult for consumers to shift away from fossil fuels.

And for the future?

Besides the uptick in optimism, this shift in thinking, from barrel price to margins, has been the biggest observable change at IP Week this year compared to previous ones. Oil is behaving differently to historical patterns, as evidenced by ‘lower for life’, but it still operates differently to other commodity markets. Why pay more for WTI/Brent than Bonny?

What does lower for life mean for traders? How do they operate in a time of reduced volatility? For traders this will mean looking for new, creative ways to leverage a market with new rules; but when we engage in a game with new rules, there will always be winners and losers and the companies that do not adjust will struggle.