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Oil: The Commodity We Love to Hate
EXECUTIVE SUMMARY
G
lobal demand for crude oil has generally kept pace with
supply for the better part of the last 35 years. There
have been various times, such as the oil glut of the 1980s
and the period following the Gulf War, where a supply-demand
imbalance occurred, but in general, the world has efficiently
produced and consumed oil. That all changed in 2008. Advances
in oil and gas production technology — coming mainly from a
new combination of horizontal drilling and hydraulic fracturing
— brought on a “shale revolution” led by the U.S. that has
dramatically altered the supply dynamics in the oil and gas
industries. Armed with these new techniques, the U.S. nearly
doubled its production of crude oil, from 5 million barrels per day
(bpd) in 2008 to 9.4 million bpd in 2015. OPEC and other energy
producers rose to meet this challenge, and the fight for market
share was on.
Initially, even with the new supply coming online, a rebounding
global economy (post-2008 financial crisis) kept global demand
for oil on pace with global supply. But with oil prices sitting
comfortably at over $100 per barrel from 2011-2013, profits grew,
by 27.9% during that short timeframe alone, which brought
even more capital investment into the energy sector. Finally, in
mid-2014, multiple years of adding new supply combined with a
weakening global economic outlook caught commodities markets
by surprise. That year, global oil supply exceeded global demand
by 900,000 bpd. Annualized, this meant that the world produced
328.5 million barrels of oil that it could not consume that year - a
trend that has continued. The global oil glut ultimately triggered
a massive price correction, with Brent Crude falling from its 2014
peak of $115.19 per barrel (in the second quarter) to $26.01 in the
first quarter of 2016. Although by mid-2016 supply was showing
signs of adjusting to the weaker price, the general consensus is
that oil prices will remain low for years.
The oil price shock has had a profound impact on global office
markets. While the positives from lower oil prices outweigh
the negatives in terms of impact on global economic growth,
the effects on the office market are more of a mixed bag. Most
energy-producing office markets have seen economic slowing and
lower occupancy levels, while stronger consumer spending has
boosted occupancy virtually everywhere else. Thus, for occupiers,
the prolonged oil price rebalancing will create cost saving
opportunities in some markets, but rental pressure in others.
In this report we assess how each of the world’s major energy
cities are performing during this challenging time and provide
insights about the office sector fundamentals going forward.