Oilprice.com recently spoke with Carl Larry, Director of Oil and Gas at Frost & Sullivan, a consultancy that conducts research on oil and gas markets, to get his thoughts on the state of oil in 2016.
Oilprice.com: I saw that you were on Bloomberg in December, and you said that you thought oil would go to the low $30s per barrel, which was a good call at the time, before OPEC would sort of relent. Do you see any chance that OPEC can actually coordinate any production cuts?
Carl Larry: No, you know, at this point I think that there is something to consider...that OPEC up until now most people had thought that the Saudis and the rest of OPEC were really pushing hard to slowdown or stop altogether shale production in the U.S. But what it seems now is that they are really fracturing OPEC, and in some ways almost undermining their own members.
So with oil prices down here and with production staying so high, it becomes a point where it's unsustainable for countries like a Nigeria or a Venezuela to continue on. I mean, other countries within OPEC are still struggling with these oil prices, including Saudi Arabia. But you can see that going forward that the more that the pressure stays on those countries that are outside of the Middle East, it's possible that they are the ones that are going to have to blink first. They are the ones that are going to have to cut back production.
OP: So countries like Venezuela or Nigeria...do you actually see them shutting in production?
CL: Yeah, I think so. I think that it's possible. It's a theory, but it's possible that when Shell pulled out of the U.S. Arctic a few months ago, they said that they wanted to cut costs. But I think that they were just shifting some of the budget that was there to uphold and maintain production in areas like West Africa, like Nigeria.
So, you know, it's going to come to a point where there is just going to be no real economical benefit to any kind of production staying at any kind of level in those countries. And once they come off, that's going to obviously support oil prices, but it might have a lingering effect as oil production will take longer to get back online again.
OP: Countries like Venezuela and Nigeria...their budget situations are much more precarious, as you said, than the Saudi Arabia's of the world. What would you see as sort of a worst-case scenario? What would real trouble look like in Venezuela? Is that like a debt default, or what?
CL: A debt default would definitely be something that comes up and it's not that something that's too far out of reach. There are a lot of oil companies that have said recently that they are cutting back their credit with Venezuela. They are not shipping as much gasoline or blending products to Venezuela in fear that they won't get paid and actually not getting paid up to date. So as you see those problems build up, you can tell that this is going to happen. This could happen sooner than later.
It is not unlike situations we have seen around 2009 when banks that were dealing in commodities were second guessed because of their credit situations. So when look at a country like Venezuela and compare it to Morgan Stanley in 2009 when people were pulling credit quickly, you can see that Venezuela is definitely at risk here, possibly within months.