Failure to curb OPEC production could have far reaching consequences for global oil markets

OPEC and it's consequences for global oil markets

George Johnson, executive advisor in KPMG's oil & gas practice comments on the OPEC meeting.

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“The outcome of Friday's OPEC meeting will have far reaching consequences for global oil markets. A failure to curb production will extend the supply overhang and could see Brent crude oil sink below US$40 a barrel; adding further pressure to the fiscal budgets of oil producing countries, whilst inflicting further misery on the upstream industry as a whole.

“Despite depressed oil prices, OPEC's track record of meeting the 30/mbpd quota over the last 12 months has been poor, with both Saudi Arabia and Iraq enjoying periods of record-breaking production. 

“Although a production cut on Friday is unlikely, the group will need to address the increase in Iranian production once sanctions are lifted in early 2016. Cooperation among OPEC members is critical. If the Iranian situation is handled poorly, and both camps (OPEC and Iran) operate independently, we could see further price erosion.”

Commenting on the potential consequences of a prolonged lower oil price Mark Andrews, UK Head of oil & gas at KPMG says: “With ‘lower for longer’ becoming the industry consensus on oil pricing, the willingness, and ability, of companies to continue to operate marginal fields is reducing. In some instances, this will result in earlier than anticipated cessation of production and the acceleration of the associated decommissioning burden. The impact could be a domino effect, raising the very real possibility of significant resources being left in the ground, as the cost of maintaining ageing infrastructure mounts for certain mature, late life assets that remain active.

From an M&A perspective, a prolonged lower oil price has produced some clarity for future pricing, and narrowed the valuation gap between buyer and seller price expectations . Those with cashflow constraints or debt burdens that require refinancing are concluding that weathering the storm of low prices may not be possible for the length of time now forecast. They are now considering M&A at valuations closer to those of buyers, who have until recently kept their powder dry. As the gap in valuations closes, we expect an increase in deal flow across the sector.”


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