Petroleum companies prepare for the "Hunger Games"

  • The term "Hunger Games" is used metaphorically in the title, implying that the oil industry will face a difficult and brutal competitive environment.

Petroleum companies are preparing for a prolonged period of low oil prices globally

Now, not only experts but even the largest oil majors are preparing for a long period of low oil prices. Such active layoffs and investment cuts have not been seen since the pandemic. What is happening in the oil market? Where will prices go?

The world's largest oil and gas companies, including Chevron and BP, are preparing for a long period of low oil prices. Therefore, they are actively laying off employees, cutting costs, and reducing investments. This phenomenon has never been seen since the pandemic.

According to Wood Mackenzie's forecast, the benchmark Brent crude oil price will fall below $60 per barrel by early 2026 and remain at this level for several years—unless there is a certain geopolitical shock. Currently, Brent crude is trading slightly below $66.

The U.S. shale industry is particularly affected. ConocoPhillips announced that it would lay off a quarter of its workforce in Texas, which has the vast Permian Basin oil region.

Even large state-owned energy companies are not immune: Saudi Aramco sold shares of its pipeline network for $10 billion to get cash, while Malaysia's Petronas laid off about 5,000 people.

Why are oil prices falling?

First, Donald Trump's protectionist policies and his approach of imposing tariffs on all countries scared the market. "If trade stagnates, it means less transportation of goods, and less fuel will be needed. The energy required to produce goods will also decrease. Just the expectation that the world will need fewer energy resources is already suppressing the market and affecting prices," said Igor Yushkov, an expert from the Russian Federal State University of Finance and the National Energy Security Fund (FNEB).

Second, interesting processes are taking place from the perspective of supply and demand.

"The International Energy Agency (IEA) states that there is currently excess production of oil globally, and OPEC assesses the situation as being on the edge of supply surplus."

"OPEC+ will return 2.2 million barrels per day of production to the market in 2025, which is the amount of production cut by eight OPEC+ countries in 2023. This is a significant volume. It has been agreed to return another 2.4 million barrels per day in September," said an expert from the National Energy Security Fund.

He predicts that OPEC+ will continue to increase the supply in the market. Winter may slow down the pace, and starting in the spring of 2026, when the car season begins, OPEC+ may start increasing production again because the organization wants to capture a larger share of the global oil market.

Therefore, Yushkov agrees that the price may fall to $60 per barrel in early 2026.

How will the market balance?

However, experts believe that the supply surplus and low oil prices will not last forever; the U.S. shale oil producers will likely become the market balancer. Their extraction costs are high, and they can quickly stop or increase production technologically. Therefore, when OPEC+ increases supply and causes prices to drop, it is the U.S. shale oil producers who will begin to cut production to balance supply and demand. American oil companies will thereby help prevent the price from falling. "Considering dollar inflation, $60 per barrel is already a low price. Therefore, when the price drops to $40-50 per barrel, they cannot maintain this level for long. The market will achieve balance primarily through the reduction of production by American oil companies," said Yushkov.

"Comparing by country, the cost of oil production in Saudi Arabia is the lowest, averaging around $10-15 per barrel. Russia's level is higher, around $20-25 per barrel, including taxes. In the United States, the cost of extracting from shale is the highest: the average cost is about $40-50 per barrel, and even higher in some fields. In Canada, the most expensive projects are tar sands extraction, whose costs often exceed $50 per barrel," noted Vladimir Chernov, an analyst at Freedom Finance Global.

Therefore, when oil prices fall below $60 per barrel, the first to exit the market will be U.S. shale and Canadian producers.

Alternative Scenarios and Future Risks

Yushkov said another scenario is that oil prices could rise due to insufficient investment in oil fields under the fear of energy transition (the shift to electric vehicles, where oil will no longer be needed). However, the expert stated that in the coming years, OPEC countries will be able to fill this "gap" because they have about 2-3 million barrels per day of spare capacity in total.

He believes that the market feeling the reduction in oil supply due to insufficient investment may come closer to the late 2020s or early 2030s. With stable demand, this will lead to rising prices.

Chernov outlined three possible scenarios for 2026. "The Wood Mackenzie scenario, where the Brent price fluctuates around $60 in 2026, dropping to $56 during the seasonal low, seems reasonable. This will be caused by the recovery of production and a slowdown in demand. However, there is a possibility of deviation: if tensions in the Middle East escalate or due to sanctions, the price could rapidly jump above $65. At the same time, there is also the opposite risk, that more severe oil surpluses could cause the Brent price to drop to $50-55. This is possible if China stops adding to its reserves, and OPEC+ continues to increase supply," the expert said.

Additionally, a fourth scenario assumes that prices remain stable above $70 per barrel. "This requires one or more 'shocks.' For example, a major geopolitical conflict in oil-producing areas or oil logistics regions (such as the Strait of Hormuz or the Bosporus), large-scale sanctions that sharply limit exports from a major supplier, or an unexpected economic surge in a country like India leading to a sharp recovery in demand. The probability of this scenario is lower than the baseline scenario now, but it is not zero, as geopolitics remains a major uncertainty," Chernov concluded.

Original: https://www.toutiao.com/article/7548721933194445355/

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