It’s no secret that the price of oil is under pressure; indeed, the price of Brent Crude remains stubbornly below $50 per barrel.
In addition, according to investment bank Goldman Sachs, the price could well dip to around $20 per barrel, less than half the current price.
Stopped In My Tracks
So when I read the comments of Duncan Soukup, chairman of Thalassa Holdings — a British Virgin Islands-based holding company engaged in the geophysical project management, services and the supply of equipment to the oil and gas industry –whilst presenting its interim results, I had to rub my eyes and read his assessment again.
As an investor, I have to say that I found his frank assessment of the current market conditions in the sector rather refreshing. What made me sit up was the following section of his conclusion, and in particular, the line (my emphasis) suggesting that the oil price could crash to below $10 per barrel:
“My assessment of the current status of the oil market, as the reader should by now have gathered, is relatively bleak in the short term. However, whilst it is difficult to argue with Goldman Sachs’ conclusion that oil could go to US$20 bbl (frankly there is nothing stopping it going back to the 1998 lows when it sank momentarily below $10 bbl), if, however, it does collapse to that level again I do not believe that it will stay there long. In fact my own view is that in the not too distant future production in the US will crater and that Saudi Arabia will turn the tap down in order to ease their own pain. I don’t have a crystal ball, but the impact will probably be a short-term spike in the price of oil, which will bury all the bears, before it retreats to a sustainable level to match demand.”
Don’t Panic!
Now, I am not one to start a market panic, and I would encourage readers and potential investors in the sector to seek out the full report and make up their own minds. But I have to admit that this report has made me think long and hard about the sector in general and its prospects going forward.
If the worst were to happen and the oil price did indeed slump to the lows last seen in 1998, it would certainly mean curtains for the numerous smaller, cash-poor producers, and put serious pressure on some of the larger players like Tullow and Premier Oil.
Indeed, further falls in the black stuff would put additional pressure on the likes of BP and Royal Dutch Shell and, importantly, the dividend pay-out.
That said, investors could also see a wave of the cash-rich, stronger players snapping up quality assets on the cheap, and if events play out as per the thoughts of Mr Soukup, then investors who are brave enough to invest in quality could well be richly rewarded over time.
What’s My Take?
I think that it would be the understatement of the year to say that there are many forces at play here, and even more moving parts as events play out in the market.
I believe that a temporary spike down in the oil price could be good news for investors brave enough to venture into the sector and hold their nerve as events unfold.
If prices were to fall further, I would expect to see only the strongest players survive the turmoil. The same players could subsequently snap up quality assets on the cheap, and when we see prices reflective of a less skewed supply vs demand, I think those brave enough to venture into the sector and pick a strong, well-managed, cash rich company will, in time, see handsome returns.