This is the first in a 7-part update series on FSG’s 2017 Events to Watch. Additional updates can be found below:
In December 2016, FSG released the report Events to Watch for 2017, which profiled the major disruptors that multinational companies should evaluate to ensure the resiliency of their strategic plans. As part of a series of blogposts we seek to review and update FSG’s view on the likelihood, impact, and signposts to monitor for each of the seven disruptors we profiled in the report. This post will evaluate the disruptor “Oil Supply Shock”.
Events to Watch for 2017: Oil Supply Shock
FSG expects that a major upward shift in oil prices (to well above the US$40-US$60 per barrel levels we have seen over the last six months) would likely be driven by a supply disruption in a significant oil producing market facing severe economic challenges because of sustained low oil prices and heavy social demands. In the event this would occur, global oil prices could rapidly increase to above US$ 75 per barrel, though we expected that after some months, prices would settle back below US$ 60 per barrel as more shale production in the US becomes profitable and ramps up quickly. The short-term price spike would still drive significant disruptions to the business environment in both oil exporters and importers.
Event’s Impact on Market Potential and Operating Environment
- Short-term boost to non-disrupted oil producers: Oil producers that are not the cause of the supply disruption were expected to benefit from higher oil prices and improved market share, at least for a short period of time
- Significant pressure on oil importers: Importers would face significant short-term spikes in oil prices and import costs, which will suppress growth and increase inflation
- Higher operating costs: Companies would likely face margin pressure from sharply higher manufacturing, transportation, and travel costs
Signposts to Monitor Revisions
In our “Events to Watch for 2017” report FSG singled out two signposts to monitor: the unfolding economic and political crisis in Venezuela, and potential short-term disruptions in the Middle East and Africa:
- Venezuela’s escalating crisis: The prolonged economic crisis in Venezuela has escalated into rapidly increasing political conflict and social unrest over the last few months, as detailed in a recent FSG blogpost. While no disruptions to PDVSA’s oil production levels have occurred (at least beyond the reduced production figures due to underinvestment and poor management), the growing potential for regime breakdown and increased violence continue to present a significant risk of a short-term disruption to Venezuela’s oil production levels, which currently stand at just under 2 million barrels per day
- Impact of perceived disruptions in the Middle East and Africa: Sporadic disruptions to supply in beleaguered markets in Libya and Nigeria continue to take place, and could influence oil prices if the supply cuts reach significantly high levels and coincide with more production cuts from other oil producing countries in the region. Meanwhile, a low likelihood risk of the Trump administration extending sanctions on Iran’s ability to export oil would not only have a significant impact on Iran’s oil supply to the global market but could also generate alarmist headlines that influence market sentiment and thus cause an uptick in oil prices
FSG had placed the likelihood of a major oil supply disruption at 15% during 2017. Given the rapid acceleration of political and social conflict in Venezuela, coupled with the continued deepening of its economic crisis, FSG is increasing the potential for the “Oil Supply Shock” scenario to 20%. While still remaining a relatively low probability event, multinationals concerned over a major oil price spike should be closely monitoring events in Venezuela over the coming months, while continuing to assess potential sources of supply disruption in the Middle East and Africa.
Actions to Take
Multinationals should be prepared to deal with an oil supply shock by reevaluating their market portfolio and reprioritizing toward markets with demonstrated resilience. In key markets that are highly vulnerable to a shift in global oil prices, multinationals should develop contingency plans to mitigate risk and ensure continuity. FSG’ s Events to Watch for 2017 report also provides in-depth scenarios, expected impact on business performance and operations, as well as recommended frameworks for contingency planning and effective market monitoring.