Which industry is unlikely to see a pay rise in 2016?

Technological innovation (horizontal drilling and hydraulic fracturing), the Organisation of Petroleum Exporting Countries (OPEC) inaction and cost deflation have effectively ended the 12 year up-cycle in oil, resulting in the biggest oil price collapse since the 1980’s. Indeed, nobody saw the US shale oil revolution coming. Between 2009 and 2015 US oil production doubled, approaching all-time highs not seen since the early 1970s and contributing to a supply-demand imbalance in global oil markets. In response OPEC, steered by Saudi Arabia, refused to cut production and actually increased it throughout 2015, effectively removing any floor in the price of oil.

After a significant increase in industry project complexity during the 2000’s, the new oil price reality is forcing companies to make significant cuts to costs. We see significant scope for cost deflation across the supply chain, such as industry wages and rig rates. In 2002 workers at two global oil majors were paid similarly to their counterparts in other engineering industries, but in the decade that followed the salary employees commanded diverged from the rest of the engineering industry. During 2015 this has started to correct, with room for further wage deflation. Another example of cost deflation has been falling day rates for oil rigs. In 2014, the day rate for an ultra-deepwater rig reached US$650,000. Just 12 months later this had fallen over 50% to approximately US$300,000 per day. We believe sector valuations reflect a much higher oil price environment.

Chris Smith – Newton, a BNY Mellon company

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