With the countries of the Opec oil cartel seemingly willing to wear low oil prices for a prolonged period, industry producers are beginning to cut their cloth accordingly and recent weeks have seen producers scaling back on investment plans and spending to the tune of hundreds of billions of dollars. But, typical of an industry where capital projects are measured over years rather than months, the global oversupply of oil is likely to take some time to correct itself and, as has been seen in previous cycles, this could well coincide with the point at which demand begins to pick up again.
In a perfect illustration of this conundrum, diversified commodities giant BHP Billiton (BLT) this week announced record production figures for petroleum as well as iron ore and metallurgical coal, both of which have also seen sharp reverses in selling prices lately on demand weakness. In response to the oil price slide, BHP announced plans to mothball 40 per cent of its North American production capacity this year, focused on high cost shale oil operations. This is unlikely to have a material effect on 2015 production with shale liquids volumes still expected to rise by 50 per cent in the year to June but should see 2016 output fall sharply. The company is also cutting spending on oil exploration by around $200m in 2015 and will take a $200m-$250m impairment hit on North American assets, too.
