Wednesday, April 27, 2016

Another view on the future higher oil price



Almost all analysts including the EIA and IEA agree that demand continues to grow at a steady pace throughout the rest of the decade, and even a minor economic downturn will only slow the pace of growth (green line), but not upend the upward trend line of demand.


But most analysts agree that the sharp drop in Capex budgets, not just among shale producers, will have its effect on sharply lowering production this year and putting growth in reverse, efficiencies and well cost reductions notwithstanding. What’s critical to note is how the media, and surprisingly most analysts, see global oil merely through the prism of U.S. independent shale players. To me, this is the critical grave mistake they make. Recent lease outcomes in the Gulf of Mexico, problems in Brazil and the likely end of spending for all new Russian oil projects are just a few of the other gargantuan gaps in global production we’re likely to see after 2016.


Longer-term projects from virtually all other conventional and non-conventional sources that have not been funded for the past two years will see their results, in that there won’t be the oil from them that was planned upon. Chevron estimated in 2013 that oil companies would have to spend a minimum of $7-10 trillion dollars to 2030 to merely keep up with demand growth and the natural decline of current wells. And this was without factoring in the drop in exploration spending that is occurring now and throughout the next two years. Severe capex cuts from virtually every oil company and state-run producer over the last two years has put this necessary spending budget way behind schedule.

The article points out a couple of facts that most people do not grasp. The first is just concentrating on US shale as if that is the only production that has any effect on the oil price. The 800lb gorilla in the room is that there has simply not been enough investment to ensure enough supply in the near future. All that oil in storage you keep hearing about. That will evaporate like a puddle on a hot summer day. Higher prices are coming and the contrarian play is top buy quality oil producers now before the crowd figures out what is happening. Once the media shifts the narrative the easy and big money will have been made. 

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