A crude awakening: Who's driving the oil price

Same old?

Since our last update in February, our benchmarking has shown that in the short term, market participants have been revising downwards their Brent oil priceforecasts. Longer term however, we have seen that there hasn’t been a significant change in long term Brent oil price expectations (average $82/bbl in 2026) as estimated by brokers and consultants.

We observe that the market seems resigned that ‘lower for longer’ is likely to last even longer and have seen some market participants reflecting this sentiment in downward revisions in the longer term Brent oil price, unlike the brokers and consultants that we have benchmarked. Oil companies have continued to adapt to this by resizing their operations, managing their costs, and concentrating on necessary rather than discretionary capital investment. 

The influence of OPEC

We commented last time about OPEC’s attempts to cut production, which were initiated at its November 2016 meeting, and expressed some scepticism about whether all the members would abide by it. There have been two further meetings now, and it seems our concerns were justified: while countries like Saudi Arabia and Russia are fully on board, others have been rather more lukewarm, including Algeria, Ecuador, and Iraq. It’s no surprise, then, that OPEC’s language has hardened of late, with phrases like ‘forcefully demand participation’ and ‘crackdown on members’ used after the most recent meeting on 24 July.

Even if such blanket ‘participation’ can be achieved, there are questions about how effective this will be in the longer term, given the number of complex factors in play: inventory levels, shale oil and renewable production levels, and regulatory/fiscal policy to name only the most obvious.

In the meantime, Brent has breached and is now hovering around the physchological $50/bbl mark. We look later at the countries which will struggle to balance its fiscal deficit at that level.

The deal environment

The relative stability we have seen in the past few months in the long term Brent oil price however, does seem to have been sufficient to prompt more deal activity. We have seen both buyers and sellers undertaking M&A transactions, and have observed that the gap between their relative price expectations has narrowed.Additionally, many deals are building in contingent price mechanisms to share the upside benefit and minimise risk on the downside in the event that the oil price moves. Now that prices seem to have settled we expect to see a slowdown in upstream M&A while companies assess the long term price environment.

In the next issue, we’ll look in more detail at the themes of how low oil prices impacts government’s fiscal deficits and the potential implications of this.

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Jacqueline Chow
Director- Natural Resources Valuations
Tel: +44 (0)7818 427 307
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