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HOUSTON -- The first week of 2016 does not bode well for the oil industry, and all indicators suggest a very ugly year is about to be had for many companies.
Back-to-back stock market crashes in China sent markets reeling across the world, and the commodities markets fell with them. The sell-offs in the Middle Kingdom -- triggering automatic suspensions of trading -- were sparked by weak industrial statistics and an ever-sinking suspicion that China's once red-hot economy is slowing much more quickly than the experts had previously expected. Some economists are calling it the "hard landing" scenario, and a few bolder ones are even predicting a recession in China this year.
Another bad sign -- Houston's real estate market is tanking.
Large-scale development in the self-styled "energy capital of the world" is rolling along, but the indicators for smaller-scale and residential markets are turning south quickly. Listings are way up, pending sales are falling, and prices are starting to fall with them, especially at the top end. Unsold inventory is rising rapidly.
Michele Marano, a real estate agent who specializes in placements for energy professionals, said all signs are pointing to a serious downturn that will inevitably reverberate nationally. The Houston metro area has topped the scales in new housing permit issuances for the past few years, with figures exceeding even the entire state of California's in some months.
She said major developers have the cash and strategies to survive, but everyone else is in trouble.
"You've got to have the money right now to get through this, and this could be 18 months, this could be 24 months, the way things are going," Marano said. "This is not just isolated to Houston. This is national. This is world. We're in a world crisis right now."
Marano argued that any developments moving forward in this city are likely holdover projects from the boom era, despite assurances from some corners of this city that ongoing builds reflect the greater diversification of the economy. She said once these projects are completed, development may come to a virtual dead stop. "You've got global economics that are falling apart, and crude oil is at 30-something dollars," she added.
The reason for Houston's woes can be seen at the world's energy exchanges. Crude prices were on track to hit a new 10-year low of $33 per barrel yesterday, a value not seen since the rock bottom of the global financial crisis of 2008-09. The bears eased up some later in the day but kept crude south of $34 a barrel.
Despite the weak economics, Enterprise Products Partners was on the record committed to shipping 600,000 barrels of oil out of the Houston Ship Channel this week, in response to the lifting of restrictions on crude exports from the United States. The shipment will find a buyer, but it isn't exactly necessary -- by some estimates, global oil in storage is close to overflowing. Meanwhile, Iran continues to insist that it will add to the till the minute sanctions on its oil are lifted.
What's a far-fetched price?
Add it all up, and last year's prediction by Goldman Sachs that oil prices would land in the $20s range isn't that far-fetched. And don't expect demand for crude to soak it all up, either, some economists are now telling us.
The World Bank on Wednesday revised downward its estimates of how the global economy will perform this year. Global gross domestic product expansion once easily achieved 4 to 5 percent levels, but for 2016, the bank said, we'll be lucky to see growth of 2.9 percent, and commensurate weak oil demand growth along with it.
Growth was weaker last year than the bank estimated, dragged down "when falling commodity prices, flagging trade and capital flows, and episodes of financial volatility sapped economic activity," its economists said in their latest "Global Economic Prospects" report.
The bank fears a broader contagion spilling over from China. Brazil, Russia, Turkey, Thailand and South Africa are said to be facing tough times from the Chinese growth slowdown and commodities market downturn. Venezuela faces the possibility of a sovereign debt default. Steeper currency devaluations risk triggering a global financial crisis.
"China is the biggest economic thing to watch," said Sebastian Mallaby, an author and economist, during a recent media call hosted by the Council on Foreign Relations. "And the reason is not that it's the second-biggest economy in the world, and the reason is not just that it's slowing down. Everyone knows that it's slowing down. The reason is that the sort of potential variance in how much it slows is big."
Mallaby warned of two potential feedback loops fueling greater stress on the Chinese economy, one between growth and investment there, and how slowing growth affects large debts. He speculated that geopolitical instability in the Middle East or tensions on the Korean Peninsula could overtake the effect of China's slowdown.
Except that isn't working, either, at least not for crude oil. Saber rattling between Saudi Arabia and Iran had a limited short-lived impact on prices. And even a new nuclear weapons test in North Korea failed to induce any response greater than a collective yawn from oil traders. Oil prices actually fell on that news.
"The current supply-demand balance is not sustainable; something has to give," concluded analysts at BMO Capital Markets in a 2016 outlook published this week. "If OPEC production increases with the return of Iran and non-OPEC production declines only modestly, global inventories could test capacity in 2016."
Despite some bullish calls for a return to $70-per-barrel crude prices this year, BMO analysts think oil could be stuck trading between $40 and $60 per barrel for some time. They're comparing the current downturn to the beginning of a past price cycle "that saw relatively low and stable prices for roughly 15 years."
Arch Mortgage Insurance Co. recently issued an alert for real estate markets in energy-dependent state economies for 2016. It sees Alaska, West Virginia, North Dakota and Wyoming at risk of experiencing steep drops in their housing markets this year.
Marano said Texas can be added to that list.
"It's not pretty," she said of the current outlook. "I think things are going to get worse before they're going to get better."
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