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Brent boost buoys new year’s beginning
The new year has arrived with a bang — a Brent crude price leap to almost $60 per barrel.
This is just the kind of start the oil and gas community wanted, but could the pleasing performance fizzle out quickly?
Analysts at Moody’s credit ratings agency still forecast oil averaging anywhere between $40 and $60 in 2017.
And that, it is worth remembering, compares with the $118 levels seen less than three years ago.
But the Opec deal late last year has definitely brought some optimism.
We now have to see whether Saudi Arabia, Russia and others fulfill all their promises to cut production.
Signs of any weakness here will undermine benchmark prices, as will the Texan shale drillers and others rushing in to take up the slack.
However, by the middle of the year, if there are signs of a new crude value stability, we will likely see a cautious rise in corporate spending.
Certainly, field operators have spent time recently doing much to strengthen their finances — cutting budgets, staff and pay, as well as projects.
The services sector has also cut charges and costs, not least by mergers. This year should see the completion of the planned tie-ups between Technip and FMC plus GE and Baker Hughes.
Still, oilfield and drilling companies look set for another tough year with demand stifled, overcapacity rife and debts high.
Defaults are likely to continue, but the stronger players may start to make more opportunist acquisitions, using shares if not cash.
New York and London equity markets have seen some new highs, with the valuation of Shell (itself newly merged with BG Group) rising by 50% year on year, BHP Billiton by 68% and Anadarko by 40%.
This is partly because of stronger oil prices, and partly due to the unexpected victory of Donald Trump in the US presidential elections. The former reality TV host has promised corporate tax cuts and a boost in local infrastructure.
He also wants to open up new federal land to help US oil and gas energy independence.
The president-elect has underlined his commitment to fossil fuels and aversion to climate change-related restrictions by a series of appointments, not least nominating ExxonMobil chief executive Rex Tillerson to be secretary of state.
Trump brings promises but also threats, as with his bellicose statements on China and Iran.
Promises on the campaign trail to reintroduce sanctions against Tehran could destabilise already shaky Middle East politics.
It could curtail Iran’s current drive to increase oil exports with the help of Western investors, potentially pushing up the price of oil further.
The verbal sparring with China also raises the general level of geopolitical risk for the oil and gas sector.
Tanker trade routes and drilling sites in the South China Sea are already the focus of military posturing between Chinese and US navies.
Meanwhile Brexit in the UK and elections in Germany and France could increase nationalism and lead to more protectionist policies.
One silver lining could be the UK trying to encourage drilling in the North Sea by improving its fiscal terms.
But even a sustained $60 oil price makes the outlook tough for mature, high-cost areas such as offshore UK.
BP sanctioned the $9 billion Mad Dog 2 deep-water project in the US Gulf of Mexico before Christmas. If Brent prices climb further, other operators will follow.
Then it really would look like oil and gas was back in business.