Houlihan Lokey – Oil Gas Industry Update, 2Q 2023

Houlihan Lokey's Oil Gas Industry Update for the second quarter of 2023 highlights the volatility of WTI prices, which have remained in the range of $65-$85 per barrel. Market participants are considering various factors, such as global inventory levels, underinvestment in exploration and development, increasing global demand (particularly from China), and the possibility of a global recession and its impact on capital availability. Recently, WTI prices have strengthened to around $80 per barrel due to production cuts by Saudi Arabia and Russia, increased oil exports to China, and expectations of a shallow recession in the US. Saudi Arabia and Russia have announced plans to voluntarily cut exports by 1 million barrels per day and 0.5 million barrels per day respectively, with Saudi Arabia extending its cut into August. These actions are in addition to a previous surprise cut of 1.2 million barrels per day announced by Saudi Arabia in April 2023, which will continue until December 2023. China's crude petroleum and diesel demand have increased significantly, with May's demand being the second highest on record. The underinvestment in exploration and development globally can be attributed to low oil prices during the previous down cycle and the upstream sector's focus on returning capital to shareholders. Analysts are bullish on future oil prices, with most forecasting WTI prices to reach around $80 per barrel by the end of 2023. Russian oil supply dynamics continue to influence global crude prices. The differential between Urals and Brent has decreased, as Urals traded above the economic-sanctions-imposed cap of $60 per barrel. This is due to the European Union, G7, and Australia imposing a price cap on seaborne Russian oil, restricting shipping, financing, and insuring of Russian oil cargoes unless they are below the cap. Russian crude flows have shifted to countries that have not imposed financial sanctions, such as China, India, and Turkey.