Thursday, June 30, 2016

Oil prices are going up


Oil prices are going up as oil supply and demand are approaching a more balanced situation, writes geophysicist Jilles van den Beukel. And they will continue to go up as supply is expected to fall below demand in the 2018-2020 period. The key factor in supply reduction is that cost cutting is leading to higher decline rates of mature conventional fields. So far this decline has been compensated by new oil field developments, but the current severe investment cuts will gradually reduce the flow of “new oil” to a mere trickle by the early 2020’s. In the meantime demand is still growing, despite the expansion of renewables and higher efficiencies.

Oil prices have been going up over the last few months, from below $30 per barrel in February to the current levels of around $50. Many short term issues of a different nature play a role here, ranging from market psychology to supply interruptions such as those caused by the Alberta wildfires. But I would argue that in the background there is a persistent upward trend, caused by the simplest of explanations: supply and demand are getting more into balance again.

As I have said many time low oil prices constrict the cashflow of producers. They cut back on exploration and development. Oil is a depleting resource that requires constant investment into new supply. No investment and growing demand equals higher prices at some point. We are reaching that point. 

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