Settings Survey Archives

ORLEN Group 2016 Integrated Report

II nagroda specjalna w kategorii Raport Zintegrowany | Najlepszy raport on-line

Macroeconomic factors


Oil companies operate in the sector of commodities − homogeneous products such as crude oil, fuels and petrochemical products, manufactured and sold by numerous producers worldwide.

A company supplying commodities is easily replaceable by another supplier offering the same commodity for a lower price, this fact significantly constrains the suppliers’ ability to control prices. Consequently, both suppliers and buyers of commodities make transactions at prices driven by the supply and demand interaction of the market.

The key external decision drivers for oil companies with a bearing on their production, growth and financial performance are:

Price path projections take into account factors that reflect changes in both supply and demand:

The frequency and status of information about these factors vary. Prices and the USD exchange rate, i.e. hard data, change continuously and are available in real time. The economic growth rate, as measured by the GDP, is an estimate published quarterly and subject to frequent corrections. In contrast, information about actual and potential supply disruptions caused by geopolitical developments emerges unexpectedly and leads to instant price changes. The effect of price changes on supply and demand is significantly delayed if lower or higher prices continue for several quarters.

Since the time when the oil market was affected by an oversupply which had gone unnoticed for a time, attention has been paid to the production structure. Among non-OPEC countries, the United States and Canada are characterised by a very short cycle of unconventional onshore oil production, a large number of oil producers, and quick adjustments to production volumes in response to oil price changes. The strong interaction between the level of output from unconventional fields and oil price changes is attributable to the extremely short production cycle. The average time necessary to launch unconventional oil production is only 90 days vs. 3-5 years needed for the development of a shallow water oil deposit or 8 years for deep-water offshore oil production. This factor has also contributed to the fast-growing oil supply in non-OPEC countries.

Among the OPEC countries, Saudi Arabia stands out due to its immediately available production reserves and the control it has over the oil production policy of the cartel and the group of five countries: Saudi Arabia, Kuwait, Iraq, Iran, and United Arab Emirates, given its strong potential to produce oil at low cost.

Another important factor now in focus are exploration and production costs. These costs play a major role in long-term oil price projections (supply and demand balance). The price of a barrel of oil may not be lower than the cost to produce one barrel of oil from the most expensive reserve, required to meet effective demand. As oil reserves are depleting, it will become necessary to drill down to more challenging resources, and the resulting higher costs of production will lead to rising oil prices

We have decided not to include financial institutions in the list of factors affecting the macroeconomic environment of oil companies even though the value of futures contracts they execute is many times higher than the value of physical market transactions. In our view, supported by numerous studies, transactions made by financial institutions increase oil price susceptibility to changes, but do not affect price change trends. In both speculative and investment transactions, financial institutions act on the basis of the same fundamental factors as those taken into account by the participants in the physical markets, including oil companies.

Go to: