From the recent peak in oil from $122/bbl on approximately June 8th to the price of $94/bbl on July 22nd, oil is down 22%. This is a rather dramatic change given the amount and short period of time. I recently discussed the potential of a recession and the impact it may have on oil demand and oil prices. There is a lot of speculation as to what exactly has driven the dramatic drop in oil price over the last several weeks. Many analysts do not attribute the move to the onset of a recession but rather speculative trading of oil future contracts. Furthermore, the spot price of oil, which is the current cash cost for immediate purchase and delivery (as opposed to the future contract price), is meaningfully higher than the futures contract price which can suggest that a precipitous decrease in demand for oil is not entirely what has driven the oil price down.
Let’s consider that the recent fall in oil price is attributable to a decrease in demand for a myriad of reasons. The question that then needs to be considered is: what will the impact be to offshore oil and gas activity in the US Gulf of Mexico? Considering that oil is currently in the mid-$90s, we should look to the recent past price trends to consider what activity levels were when prices were at least 20% less than they are today. This would take us back into the conditions of late 2021 when demand was beginning to surge from the downturn lows. Additionally, many energy companies reported near record earnings during 2021 during which the average oil price was $69/bbl.
With continued earnings margins on par with those of 2021 and with prices in the high $60/bbl range, it is a reasonable assumption that even with oil prices retreating another 15% from the current levels there should not be any USGOM reduction in offshore oil and gas activity. It should also be noted that even with oil prices averaging around $100/bbl thus far in 2022, floating drilling rig counts have not increased. Much of the activity driving vessel demand is related to increasing production and/or platform rig drilling from floating production platforms. Because of this dynamic, a large portion of offshore activity is less capital intensive, meaning less expensive, and thus less sensitive to decreasing oil prices.