It was almost a year ago, when having tumbled in early 2015, oil proceeded to rebound strongly into the summer, where it traded at about $60 for three months, before U.S. production resumed resulting in the next big leg lower which culminated with this February’s drop to 13 year lows. At that point a comparable rebound to last year materialized, and just like last year, the pundits have emerged claiming that there will be no further downside. Incidentally, we covered this comparison previously in "For Oil 2016 Is Setting Up To Be A Rerun Of Last Year."
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However, unlike last year, not everyone is (wrongly) convinced that this time the rebound in oil will be sustainable. One very prominent company that is already preparing for the next oil crash is the world's largest shipping company, Danish conglomerate A.P. Moeller-Maersk A/S (also known as Maersk). Related: 500,000 Barrels And $1 Billion In Losses: The True Cost Of Canada’s Wildfire
Maersk is perhaps best known for its pragmatic, even downright bearish outlook on the global economy. Recall that three months ago, the company admitted in its annual report that "demand for transportation of goods was significantly lower than expected, especially in the emerging markets as well as the Group’s key Europe trades, where the impact was further accelerated by de-stocking of the high inventory levels."
The company's CEO, Nils Andersen, told the FT in February that "it is worse than in 2008. The oil price is as low as its lowest point in 2008-09 and has stayed there for a long time and doesn’t look like going up soon. Freight rates are lower. The external conditions are much worse but we are better prepared." Related: Shell’s Profits Plunge 83%
It is the risk that the current 60 percent rebound in oil prices from 2016 lows is just another temporary bounce that has forced Maersk to start preparing for the next oil crash. The company's CEO is confident that since the world keeps producing more petroleum than it can consume, it is "adapting its cost base to prepare for the risk of lower crude prices" according to Bloomberg.
As a result, Maersk's oil unit is already exploring bigger cost cuts than previously planned. "The price will obviously be driven by the balance between supply and demand and there will be oversupply for many months still,” he said by phone from Copenhagen. "It definitely can’t be ruled out that the oil price will fall again."
To be sure, Andersen is ultimately bullish on higher oil price... he is just not bullish on the path that oil prices will take to his higher price target: "I have previously said the oil price was too low, but it’s very plausible that the balance between supply and demand will continue to be unfavorable,” Andersen said. Related: The Shale Sector Just Got Two Critical Wins – In Two Different States
Recent cost-cuts by Maersk have drastically reduced its breakeven oil price: in its latest full year forecast, the company predicted it can now break even with oil at $40 to $45. It previously said oil needed to trade at about $45 to $55 in order to avoid a loss. "We’re happy we’ve reached the goal we set,” Andersen said. “We will definitely work on cutting costs even further."
As it continues to cut costs, we expect that Maersk will soon be profitable with oil in the $30, if not lower. Which is precisely the contingency Maersk is actively preparing for.
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