Energy Snapshot: Industry Themes - February 2016

With the Brent oil price down to a range of US$30-35per barrel, the production cost curve for oil shows that 3.5 million b/d is failing to cover the cost of production, but only 100,000 b/d has been shut-in to date. A large proportion of the marginal production comes from US "stripper" wells. Subsequently, US oil stocks are at an all-time high, but we believe that there is sufficient storage capacity for over half a year at recent build rates. Demand is responding positively as we see that car sales have surged in China, surpassing the US. In the global upstream sector, focus has shifted away from exploration in the low oil price environment, but companies have not completely rejected it as we've seen in Myanmar and Mexico's deepwater bid round. The corporate world is seeing a slow asset market with a large divergence in price expectations between buyers and sellers, leading to increased pressure on companies to balance their books.