Economic Studies


Latin America
Northern America
Central & Eastern Europe
Western Europe
Emerging Asia
Middle-East & Turkey
Change sector


  • Resilience of diversified sector majors
  • Expected growth in demand in 2017
  • Oil company efforts to streamline their production
  • Implementation of an agreement to freeze production


  • High debt levels especially among shale oil companies
  • Surplus oil production
  • High volatility in crude oil prices
  • Overcapacity among certain oil & gas services companies

Risk assessment

Change in global investments, base 100 = Q1 1990

Change in global investments, base 100 = Q1 1990

The Vienna agreement should support oil prices during 2017, due to a rebalancing between supply and demand. The freeze on investment projects at major oil groups is expected to last throughout this year though, especially in view of a lack of liquidity and high debt levels.The reduction in spending on exploration-production (E&P) has affected subcontracting companies.A large number of fields are no longer profitable enough and generate operating losses.

Furthermore inventories are still high, although they are lowering. This weighs on oil prices. Although demand is increasing semester after semester, it did not bridge the gap with the supply levels reached by the end of 2016.

However, a number of shale oil actors have succeeded in adapting to these low prices by drastically lowering their breakeven point, by roughly 20%.By streamlining their production processes, they have limited the impact of the plunge in prices on their margins.Nevertheless, a breaking point seems to have been reached in 2015 and the effects of this are still present today.A study by law firm Haynes and Boone estimates that between early 2015 and end-July 2016, almost 90 companies in the US oil exploration sector went bankrupt. The largest so far are Sandridge Energy ($8.3bn in debt) and Linn Energy ($6.1bn).


Global demand for oil should reach around 96.7m bpd in 2017, according to the EIA, i.e. a 1.7% rise compared with 2016.

Demand in Europe is likely to fall slightly in 2017, reaching 13.7m bpd on IEA figures. Refineries (NWE Brent cracking) have managed to benefit from the plunge in prices since June 2014 to improve their margins. However, these have stabilised at around $3/b. For 2016, we expect a decline of 5.7% in European refinery production to 11.6m bpd, given the maintenance undertaken in October. The start to 2017 is also set to see less robust output, continuing on the end-2016 trend, with growth in production of 2% reaching 11.4m bpd. One of the unknowns that could have a positive effect on consumer spending is how harsh the winter is, given high energy consumption during the period. Furthermore, changes in industrial activity in Europe should remain a key factor, since this prompted a 130k bpd plunge in consumption of oil products during summer 2016.

According to the IEA, demand for oil products in the US should notch up slightly by 0.6% in 2017 (1.1% in 2016). The reason most cited for this low growth is the likely increase in oil prices. Coface estimates that Brent prices should average $53/b in 2017 vs. $44/b in 2016. In addition, the production capacity utilisation rate lowered slightly in 2016 compared to 2015 and should decrease in 2017. This development results from an increase in margins in 2016, supported by improved oil prices. Attention should be paid to how harsh the winter is (probably caused by the El Niña climate phenomenon) as well as to industrial activity.

In Asia, refining margins (Dubai hydrocracking) plummeted during 2016. Chinese and Korean demand explained this downturn, since this is also narrowing, if not slowing. Chinese demand is expected to grow very slightly in 2017, to 11.8m bpd from 11.6 million in 2016.  Korean demand is also set to show slow growth in 2017, of around 2.7% to reach 2.6m bpd vs. 2.5m bpd in 2016 on IEA estimates and forecasts. Indian demand looks set to grow by 7.5% in 2017.


Oil supply is expected to stagnate at 0% in 2017 according to Coface, after an increase of 0.2% in 2016. The Vienna agreement, if respected, may freeze the supply growth. Nevertheless, some uncertainties remain from the new “swing producers”, namely the unconventional American oil producers. The IEA estimates that investment spending in exploration and production plummeted 25% in 2015 and 2016, not to mention the sharp reductions in operating costs of more than 35% between 2014 and 2016.

All operators are struggling, although productivity has improved. Law firm Haynes and Boones estimates the number of bankruptcies in the sector at 90 between January 2015 and July 2016. These companies have combined debt of $67bn. This trend is likely to continue in 2017 given the sharp growth in debt. Nevertheless, a recovery in activity has been noted since the low point reached in May 2016, with a 50% increase in active wells during the second semester of 2016. The election of Donald J. Trump, a strong advocate of deregulation, may help US oil producers by repelling law enacted to protect the environment. But the economics of the oil sector won’t change overnight as they are driver by international market trends.

In Western Europe, financial results for the main E&P companies have continued to plunge: in H1 2016, sales at Total fell 20% over one year, whereas adjusted net debt plummeted 33%. The upstream segment has incurred the deepest decline, whereas the downturn in the refining segment has been less harsh. Investments have followed the same trend with a 33% decline during H1. Meanwhile sales and earnings at Shell plummeted by 23% and 80% respectively. We estimate that the risk is higher for oil services groups as they are directly affected by the fall in investments. Lower business in exploration, given fields that are difficult to access, have led to significant asset writedowns and disposals.

Chinese production is set to fall by 3% in 2017, after a 6% decline in the previous year. The major Chinese companies are making the most of low prices to close wells that are expensive to run. The extended weakness in prices has also dragged down profits and cash flows, particularly for public companies. We believe that credit risk is lower in the country since companies in the sector benefit from public support and their vertical integration (presence in refining and distribution of oil products).

Latin America is facing the same problems. Petrobras and Ecopetrol are set to reduce their investments by respectively 24.5% over 2015-2019 and 40% in 2016. In return, oil services companies such as Vallourec are adjusting their production and are not hesitating to produce jointly with Mitsubishi in order to cut costs in a falling market.


Last update : December 2016

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