We expect investments in the exploration and production oil sector (or capital expenditures, aka CAPEX) to continue plunging in 2016, with a -25% fall, on the heels of a -28% dive in 2015. Delayed investment spending accounts for the equivalent of about 30bn barrels of oil reserves, and new investments are not due to come on stream before 2020 at least.
By postponing (if not cancelling) investment spending, oil companies have started to offset the impact of lower revenues and curb the fall in margins. The main culprits are Canadian oil sands projects, new U.S. shale oil wells, and high-cost deep water fields, especially those in Angola, Nigeria, the North Sea and the Gulf of Mexico.
A few oil players such as state-owned companies in GCC countries benefit from sovereign funds’ large cash hoardings and might get away with long-term depressed oil prices. Although the underlying problem remains and the ongoing de-hoarding of cash cannot last forever, wealthy producers are still far away from running out of money. Thus, these countries can easily withstand this period of turmoil.
Considering Iran’s looming return to the market, the question is: how long will oil prices remain low?