Sunday, September 24, 2017

Oil market in stealth recovery?

Oil prices have recently traded above $50 for the first time in a long time. I think that sentiment is still pointing to an expectation of lower oil prices.
However recent IEA stats indicate that demand is exceeding previous expectations:
Global oil demand grew very strongly year-on-year in 2Q17, by 2.3 mb/d (2.4%). For 2017, we have revised upwards our growth estimate to 1.6 mb/d. OECD demand growth continues to be stronger than expected, particularly in Europe and the US. Hurricanes Harvey and Irma are projected to slow US oil demand growth in 3Q17.
What most people seem to be forgetting is that the oil business is a business with depleting asset as its product. Every barrel of oil that is produced has to be replaced with a new barrel.
If an oil company wants to grow than it has to run even faster and not only replace the produced barrels but find even more new barrels. 
Because the oil price has been depressed for several years, oil companies have been in an austerity mode and have not been making the necessary investments to replace the depletion that has taken place.
That does not mean I think oil is going back to $100 a barrel anytime soon but I do think $50 is a floor and we could move up to $60-65 per barrel quite easily.
I expect that the low prices we have experienced will lead to higher prices and increased exploration activity. There has been quite a bit of carnage in the oilfield services business with many companies going out of business. I suspect that the survivors will be positioned to thrive over the next five years as investment returns. 

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