Source: Flickr userJustin Vidamo.
The worst, it would appear, is over for the oil market. At least that's the conclusion one could draw after reading through comments made by Schlumberger Limited CEO Paal Kibsgaard on the company's second-quarter conference call. Here's a closer look at his comments on the company's current view of the oil market.
We can't see much, but what we see is positiveKibsgaard started off his comments on the oil market by saying that, "visibility still remains limited, however, some tentative signs of change are emerging." He then spends some time going through those signs, first looking at the overall supply and demand picture in the oil market and then what that means for the industry.
In commenting on supply, Kibsgaard noted that,
He first notes that OPEC producers, namely Saudi Arabia, are currently pumping out oil at nearly max capacity. In fact, OPEC's spare capacity is down to just 2.3 million barrels per day, which is a concern because if there were to be a big supply disruption it could lead to short-term super spike in oil prices as OPEC wouldn't have the means to make up the difference.
Kibsgaard then turned to supply from the rest of the world noting that,
In other words, oil supplies from around the world are falling with Brazil and Mexico pumping out much less oil than last year as a result of lower spending on new wells. This, combined with lower spending in the U.S. and Canada, is resulting in lower global oil production outside of what OPEC is supplying. Kibsgaard continues by pointing out that,
What he is pointing out is that while OPEC is pumping out as much oil as it can, the rest of the world is pulling back. At the same time global demand growth is accelerating, all of which suggests that the supply glut is nearing an end. In fact, he suggests that balance is just a couple of quarters away.
What this means for the oil industryKibsgaard then turns his attention to the oil industry and notes that so far spending on exploration and production is down 35% in North America. However, he then proclaimed that,
What he's saying here is that the U.S. rig count has likely reached bottom, however, a recovery in drilling activity will be slow. Further, given the fact that there is so much idle drilling rig capacity, service pricing will remain weak for a while, which is a challenge for its business.
That being said, while the slow recovery will be a challenge to oilfield service companies like Schlumberger, he sees a much better outlook for oil and gas producers. He said that,
In other words, he sees the potential for a second half rally in oil prices, which could lead to an increase in oil and gas drilling budgets as we head into 2016. That increase in spending and activity levels will eventually trickle down to Schlumberger via increased revenue and earnings.
Investor takeawaySchlumberger's CEO is basically calling a bottom in the oil market. He believes that supply and demand will balance out in the second half of this year, which should lead to higher oil prices. Further, he also believes that the U.S. rig count has bottomed. However, he doesn't expect that to have much impact on activity levels this year. That said, he does believe that oil companies will boost their capex budgets next year, which will drive higher oilfield service volumes and could potentially lead to an acceleration in Schlumberger's revenue and earnings.
The article Schlumberger Limiteds CEO Calls the Bottom, but Still Sees Challenges Ahead originally appeared on Fool.com.
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