Tuesday, August 23, 2016

Oil demand is relentless and so is depletion



The fundamentals also are supportive of oil prices. Non-OPEC production is on steady decline. Demand growth is relentless, moving up more than a million barrels per day each year. This world will soon be consuming over 100,000,000 barrels of hydrocarbon based liquid fuels and feedstock daily. It is clear that the price of oil cannot stay under $50/Bbl much longer because producers cannot meet demand at that price.

OPEC only supplies about 40% of global oil demand. Outside of the Middle East there are only a few places where oil reserves can be developed profitably for under $50/Bbl. We are lucky to have a few of them in the United States.


During the first six months of this year, the energy sector’s weighting in the S&P 500 dipped below 7%. There has never been a time when the energy sector’s weight has dropped below 7% and the sector did not outperform the market over the subsequent three years. This is not going to be the first time it happens.

As I have highlighted in many blog posts oil demand in the emerging markets and frontier markets is raging ahead. As people become wealthier they buy cars and once they buy a car they do not put it in the garage they drive it which means more demand. 

No one really talks about depletion. Without even talking about how drastically shale oil wells deplete the overall depletion rate for the world is 6% per year. That's nearly 5 million barrels per year of new reserves that has to developed and brought online in addition to demand growth of 1 million barrels per year. 

With investment in new production way down with the price we are talking a when event not an if event regarding higher oil prices.

The stat from the article about energy's weighting never having dropped below 7% and then energy stocks not being higher three years down the line is intriguing also. 

As long as the world economy does not have a world wide depression than oil prices are heading higher over the next couple of years. 

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