After months of depressed oil prices, West Michigan manufacturers with operations in the oil-and-gas industry could soon experience a reprieve.
The reason: The Organization of the Petroleum Exporting Countries (OPEC) struck an agreement in late November to slash production by 1.2 million barrels a day, marking the first time the group lowered its output since 2008. OPEC countries produced roughly 33.6 million barrels of oil a day prior to the agreement, according to reports.
Industry experts say that cutting the foreign supply of oil could ease a market glut that’s held down prices for nearly two years. It’s a timely move that could encourage domestic producers to increase production and file new orders with equipment manufacturers.
“Certainly, it will be a short-run bump, and that’s good,” said Paul Isely, associate dean of the Seidman College of Business at Grand Valley State University. “It’s certainly going to throw a lifeline to U.S. oil producers, and it’s going to increase their ability to do exploration and production, which means they’ll need equipment.”
Oil prices spiked 9.3 percent to $49.44 a barrel on the day of the OPEC announcement and have since stabilized around $50 a barrel at the time this report went to press. As a result of cutting production, OPEC hopes prices rise to around $55 to $60 a barrel, according to a report in the Wall Street Journal.
An uptick in oil and gas activity on the homefront could spell a welcome break for West Michigan manufacturers that have worked to adapt their business models to flagging oil prices. The once-booming sector faltered after surging production drove prices down to a low of around $28 a barrel in January 2015. Prices increased modestly since then but have remained low.
Byron Center-based Plasma-Tec Inc., which derives the majority of its business from the oil-and-gas sector, relies on work in other industries to sustain the company during slowdowns in the market and uses the boom times as a chance to reinvest.
Despite OPEC’s decision, Plasma-Tec’s outlook remains conservative for the industry, said Vice President Chris Wysong.
“If there’s an uptick in oil prices that is sustained — that would drive more business across the oil service industry,” Wysong wrote in an email to MiBiz. “As a result, we would expect to see an uptick in the oil and gas side of our business.”
A sustained increase in oil prices is key for domestic producers to regain confidence, bring dormant wells back online and begin placing orders with manufacturers, Isely said.
Still, Isely cites evidence that the oil rally could falter in the coming months. For one, OPEC members are not required under law or contract to comply with the agreement. Moreover, higher prices also hinge on other large oil-producing and oil-dependent countries like Russia and Venezuela not increasing production to fill gaps in the market left by OPEC. It’s a situation that adds an element of uncertainty for domestic oil-and-gas producers, Isely said.
“We’ll have to see this for a month or two before people are running out and putting out new orders for extra equipment,” he said.