A black swan is an event with rarity, extreme impact, and retrospective predictability (only with hindsight is it predictable).
With known pointing to a difficult 2016 for O&G, we are taking a minute to think outside the consensus trend lines today.
Although black swans are impossible to predict by definition, we can imagine various scenarios that could really shake things up in the oil markets in 2016. Certain events that no forecasters are baking into their estimates could send oil back to $70 in a flash. Others could crumble the shaky foundation oil prices rest on at the moment.
For this thought exercise, we have enlisted the brain cycles of some of Oilpro’s most popular contributors. We asked this select group of industry thought leaders to envision outside the box scenarios for 2016. Across the following 15 slides you’ll find our ideas and theirs. Please note these aren’t our predictions, but rather our what-if musings on potential high-impact scenarios.
Please feel free to add your own ideas in the comments section. Then buckle up and hold on for the ride in 2016!
1. Saudi Arabia Recants (Oil Up)
Four black swan project contributors mentioned the hypothetical of Saudi Arabia changing its oil price stance next year. Paul Parsons says Saudi Arabia could make an abrupt change in policy if social unrest and disgruntled family members force the current leadership to acknowledge that it is meritless to maximize production and defend market share if that strategy loses more near-term revenue than can be made up in the long run.
Mike Shellman predicts that the Saudis will cave and cut production by 2nd quarter next year. He says: Saudi Arabia is currently producing in excess of 10.6 MBOPD, an all time high. According to the Financial Times, however, Riyadh will likely report an “eye watering” budget deficit of 17.5% of GDP in 2015, about 130 billion dollars. It’s hurting financially like we all are. Any willingness on the part of major oil producing nations outside OPEC to cooperate with production cuts in 2016 will result in the Saudis capitulating on their market share agenda.
Mark Allen acknowledges the possibility of an OPEC policy change as well, although he sees it as unlikely due to cumulative public disagreements between member agents and simmering KSA-Iran proxy war tensions. He says that if OPEC were to decide to reign in production materially it would send a signal to the market to correct the price. Given the large inventory of crude now built up, the response would be more attenuated than a similar action even one or 2 years ago, but it would be in a positive direction for the industry.
William Edwards says that an awakening of the Saudi oil ministry to control the pricing mechanism could establish an oil price that would instantly become stable. Futures trading would disappear, along with the negative ramifications of speculative oil pricing. And petroleum-related planning would then become legitimate. However, Edwards notes that the selected price would probably be a disappointment to the North American and offshore industries, most likely something in the $50/barrel range.
However unlikely, if Saudi Arabia voices support for a return to production controls, oil prices would rise sharply (but much lower than before) on those words alone, and that shift is impossible to predict, qualifying it as a black swan possibility for oil in 2016.
2. War In The Middle East (Oil Up)
With global tension flaring as the year comes to a close, three Oilpro thought leaders mentioned war as possibility in 2016. The US tiring of ISIL terror and going to war is not hard to imagine. Russia is already in the Middle East and China could join in because of the risk oil supplies are cut off. A war creates demand for oil and would send oil prices higher overnight.
Mark Allen believes planned military engagement would likely ease up prices more gradually even if there were no conflicts directly impacting oil facilities. But he also notes the production risk of a MENA war. He points out that the spare capacity held back by OPEC leaders is narrowing to an unprecedented level, implying greater vulnerability and volatility if a material element of production was unexpectedly disabled.
Jim Warren thinks ISIS will be squeezed throughout 2016, and it will see more if not most of its oil revenues disappear in Iraq and Syria. This will force them to seek new areas of operations, and he see greater ISIS involvement in Libya, Nigeria and Algeria as they seek to re-kindle new lucrative revenue streams from O&G in these regions alongside the spreading of their political and ideological doctrines. But Jim doesn’t think the US will put substantial numbers of boots on the ground in the Middle East given the Presidential race even though more terror attacks are likely in the West. In the Middle East, Jim notes the growing influence of Iran in Iraq. Iran’s emergence as a major player in the region may lead to tensions if not confrontation with Saudi Arabia. Meanwhile, Turkey will likely put more military assets into Northern Iraq to combat not ISIS but the Kurds. This is already happening but the situation is escalating and all of this will have an impact on middle eastern O&G production.
3. Vladimir Putin Falls (Oil Up)
Three black swan project contributors see this as a possibility. Mark Allen wrote in that the fate of the world’s most powerful man, if he is pushed (or somehow eliminated), would jitter the markets upwards.
Richard Bradbury gave us the following hypothetical: Tensions escalate between Turkey and Russia; Putin occupies Georgia under the pretext that he is protecting Russia’s borders. The U.S. is forced to place more troops in the Middle East in order to reinforce Turkish and European allies. Heavy sanctions are placed on Russia, limiting the country’s oil exports. Oil prices go up as producers rush to meet the energy needs of Europe and Asia. Putin and his inner circle are challenged and removed from power by a capitalistic-minded oligarchy. The disruption creates a power vacuum and throws Russia into chaos. All bets are off. Oil remains high as the market restructures to fill the void of a splintered and weakened Russia.
Similarly, Paul Parsons can envision a scenario where Turkey blockades Russian oil. If tensions do escalate between Turkey and Russia, Turkey could attempt to block certain Russian vessels seeking to pass through the Bosphorus and Dardanelles on the grounds that they would be positioned to attack sensitive Turkish territory. If that blockade were to expand to Russian crude oil tankers, it could temporarily remove perhaps 1-2 million barrels of Russian crude exported from its Black Sea terminal.
4. Easy Money Dries Up (Oil Up)
The shale revolution was financed with cheap money and those days are now over. Between dismal oil prices and a rising interest rate environment for shale producers, the economics have dramatically changed from one year ago. Up until now, banks and producers have had only one choice, offset lower prices with an increase in flow rate.
Now, overconfidence and optimism will be replaced humility and a coming to grips with reality. Defaults and bankruptcies will occur at an astonishing rate and will bring a new meaning to trickle-down economics for the OFS provider. The commodity markets will realize this before the industry does and prices will head north much quicker than many think. Many believe 2016 is lost for the O&G biz but maybe, just maybe, 2016 will be the year for the O&G contrarian.
5. Social Upheaval (Oil Up)
Even stopping short of war, social unrest could send oil prices higher. Jackie Gillispie contemplates the following scenario: Low oil prices cause governments to cut back or eliminate social services to the populace of their countries. When a population has been given more than they have ever earned, losing that benefit will cause them to turn on their own leaders. This has been brewing in many countries since last year, including Venezuela, Ecuador, Nigeriea, and others. But the most dangerous place it has been occurring according to reports is in the Kingdom of Saudi Arabia. The KSA populace would not have to go as far as blowing up the wells like we saw during the Gulf War, but they could shut down the country’s ability to ship oil around the world. A government can only push its people so far, and then they react with a passion that makes them blind to their on personal consequences. KSA regime change or their infrastructure out of commission would mean a new direction for the price of oil.
In a hypothetical submitted by Steve Swanstrom, it may get so bad that extreme factions in the KSA populace attempt assassinations of high ranking officials or members of the oil ministry.
6. OFS Exits Create Price Spikes (Oil Up)
The extreme financial pressure levied on oilfield service (OFS) contractors is causing a mass exodus of talent and will result in unprecedented scrapping in 2016. In some extreme capacity exit scenarios, operators could find themselves unable to secure the OFS capacity needed to ramp production to meet demand in the future, causing significant oil price spikes. In this scenario, the surviving OFS contractors would be able to push through big price increases, and new entrants would again flood the market to build capacity.
7. The US Dollar Collapses (Oil Up)
Todd Bush can envision the US dollar index crashing back to 2012 levels due to a lack of US growth and rampant uncertainty across US industries. The crash could actually be a tailwind for O&G as crude prices increase with a decline in dollar.
Paul Parsons also identified this potential black swan. If the US Dollar drops substantially relative to other currencies, it would raise the international price of oil in dollar terms. That would benefit the US industry.
8. Red Monkey Depression (Oil Down)
The Chinese welcome the Red Monkey in 2016. Interestingly, this Zodiac animal’s primary attribute is changeability. This could be the understatement of the decade. Why? China is a black box and we could find that the emperor is not well dressed under that robe.
In a matter of weeks, not months, Chinese markets could go into free fall. The global economic consequences will send us back to where we were in 2009. Central banks the world over have already used the bulk of their ammunition and options will be limited to soup lines.
China could experience their own Great Depression and the oil & natural gas markets won’t like it one bit. Of course, if this happens, the price of oil will be the least of our worries.
9. US Or Global Recession In 2016 (Oil Down)
With US economic data steadily deteriorating, Christopher Lemieux thinks the largest global economy could fall victim to a recession between Q2-Q3 next year. If the US slips into recession, which nobody is expecting, we could see a substantial decline in consumer activity that will greatly effect crude and gas consumption. Oil consumption declined quickly between 2007 and 2009, if this happens again it could spell out trouble for already weak oil prices.
For his part, William Edwards believes a collapse of the world economy would will devastate oil demand and prices. He believes this is almost a certainty, but the timing is unknown.
A US or global recession is a potential negative black swan for the oil market in 2016.
10. Massive Gulf Coast Hurricane Strikes (Oil Up)
A Gulf Coast Hurricane that takes out production infrastructure could create pricing havoc, but with no lasting effects.
11. New Alliances Form (Oil Up) & Old Alliances Crumble (Oil Down)
Several contributors envisioned a power shift in the oil control chain.
Todd Bush suggests that similar to NAFTA, a North America petroleum agreement could be into place to reduce dependence on OPEC countries to 20% of imports. Geopolitical issues create new dynamics between countries. And North America resorts to insulating its economies with neighbors, fostering a healthy environment for NAM E&P.
On the other hand, an all out production war could disband OPEC and sink oil prices Tom Kirkman writes. If the internal rift exposed during 2016 widens, OPEC could officially disband. In this scenario, every single oil producing country produces at maximum capacity, to try to generate cash, and oil prices fall rapidly to levels that force some producers (and countries) into insolvency.
Allen Brooks could see a new OPEC being born. He suggests Saudi Arabia and Russia could make a political/economic deal over the Middle East and the oil trade. They agree to cooperate and cut oil output to boost prices. Saudi agrees to buy more weapons from Russia. Russia agrees to straitjacket Iran and its puppet Syria. No surge in Iranian output and no nuclear Iran allowed – peace breaks out! The cooperation also means no $100/B oil, but the West does pay more while consuming more oil. America and Europe are pushed out of the Middle East, replaced by Russian influence. The China energy market becomes captive to this new OPEC.
12. Climate Change Policy & President Clinton’s Agenda (Industry Negative)
Mark Allen imagines that Hillary Clinton becomes the leader of the free world and immediately phases out US oil subsidies and introduces a carbon tax. None are great outcomes for the embattled industry, but if it is going through such a steep metamorphosis then what better time for a victorious Democratic party to attack oil subsidies and redirect these to renewable tax credits as the power and relevance of the oil lobby wanes?
In this scenario, investor sentiment is further undermined as corporate dividends become harder to honor, and political influence of oil industry wanes in the shadow of growing green values and uptake of renewable technologies, particularly in Europe and China (including energy storage and transportation technology breakthroughs developed here in the US).
On the climate change front, technology already exists to make use of the low grade heat available in thermal oil production facilities, refineries and upgraders but, to date, they have never been economically feasible. Larry Ginther told us the big question now is whether new carbon regulation and taxes will be enough to make new technologies feasible. In Alberta, a new carbon tax will be applied to all GHG emitters, including home heating and automobiles. The impact on the Alberta Oil & Gas industry could be as much as $0.50/bbl. The intention is that this tax will drive the industry to become more GHG conscious and ferret out new means to reduce emissions. Larry also wonders what are other jurisdictions/regions/countries might do next year to meet the GHG reduction targets agreed upon at the 2015 Paris Conference.
13. The Golden Age Of O&G Begins In 2016 (Industry Positive)
Doug Sheridan sees a possible positive outcome for the industry from low oil prices: O&G’s share of global energy markets could unexpectedly explode over the next two decades.
Rather than undermining the ability of the oil and gas industry to find and produce oil and gas, low commodity prices actually act as a catalyst for a “second leg of technological innovation” in the industry. Operators and suppliers hone, even “perfect”, the processes of finding and producing hydrocarbons to such a degree that $40 oil and $2.50 natural gas become sufficient price points for heavy ongoing investment by the industry.
Price ceilings of $50 – $60/bbl for oil and $2.50 – $3.50/MMbtu are effectively established as a result, making hydrocarbons the de facto fuels of choice for industry and consumers. Gas-fired power plants dominate the power sector, causing renewable energy investments to be labeled as “stranded assets” that unsuspecting utilities struggle with for years. In 2035, pundits refer to the twenty years beginning in 2016 as the “Golden Years of Oil & Gas”.
14. Tanker Disruption (Oil Up)
Paul Parsons notes that if war or terrorism threaten certain oil terminal locations, tanker routes or chokepoints, the perceived risk could cause maritime insurers to deny tanker coverage before any actual attacks have materialized. Inability to obtain tanker insurance would effectively disrupt crude flows and take some crude off the market.
15. Oil’s Replacement Found (Oil Down)
For decades folks have wondered when, if, and how oil would be replaced. Is 2016 the year? We can’t know, but a dramatic technological advance that curtails fossil fuels consumption is something William Edwards remains wary of. Mark Allen sees potential in new technologies being worked on today including Hyperloop, Gigafactory and Fusion, which all may be on the menu in the future, closing the book on the dark days of fumes.
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