Months of supply cuts and insufficient investment are about to impact resurgent demand, as the arrival of vaccine buoys expects a rapid return to normalcy. This is a perfect recipe for turning what is currently an excess of oil into a market of scarcity capable of raising prices high enough (above $ 65 a barrel) for exploration and production companies to drill again.
After ten months of forced layoffs and consolidations caused by pandemic-related shutdowns, higher prices would be good news for producers and service companies in the oil field and the refineries that depend on them, not to mention the communities. largely rural Texas, Louisiana, Oklahoma Pennsylvania producing much of America’s traditional fossil fuels.
But there won’t be a full return overnight, despite the unbridled enthusiasm of traders. The U.S. benchmark West Texas Intermediate (WTI) closed at $ 50 a barrel last week for the first time since February as the vials of Pfizer’s new vaccine began to hit hospitals.
For now, oil consumption remains depressed, as governments impose new travel restrictions to curb the spread of the virus during the holidays, a season that in any other year would be associated with increased demand for petroleum products. Gas prices are less than $ 2 a gallon in much of the country.
There is also a sea of oil stored waiting for market conditions to improve. World oil inventories are at an all-time high, at nearly 3 billion barrels, and the OPEC alliance led by Saudi Arabia and Russia has a huge production capacity.
Forcing these bones to return to hibernation will take time, as well as inoculating the entire country against the coronavirus. But the potential for oil consumption to return to traditional levels before supply is ready to meet it is a threat or opportunity approaching, depending on your perspective.
The oil industry has drastically reduced investment in exploration and drilling since 2015 in response to the tightening of capital markets and the demand from higher-yield investors.
Globally, investment in oil and gas amounted to about $ 880 billion in 2014. This year’s investment is expected to be $ 383 billion, the lowest level in 15 years and a huge investment of $ 20 million. % below 2019, according to energy consultancy Rystad Energy.
Exploration and production executives have been reluctant to make large investments after being bitten twice by falling prices over the past five years. This splash from the boardroom won’t go away immediately.
But the market clearly expects the industry to recover in the short term. Exploration and production companies have seen a flood of investment in the last six weeks that has increased stock values by 50%.
The International Energy Agency (IEA) expects oil demand to return to pre-pandemic levels of 100 million barrels a day over a period of 12 to 18 months. However, IEA analysts warn that if current low levels of investment persist until 2025, some 9 million barrels of supply capacity per day will not materialize. This is approximately the amount of excess oil on the market now due to the pandemic-related shutdowns.
ConocoPhillips chief operating officer Matt Fox recently told shareholders that up to 4 million barrels a day of supply could be lost in the coming years for the same reason. The shale sector, which saw production drop from more than a million barrels a day to less than 7 million barrels this year, will have trouble filling the gap on its own if tight capital markets do not reopen. and allow oil companies to invest.
All this adds up to a picture of supply demand that is bullish for US producers in 2021 and 2022. These factors will only determine the magnitude of the shortage. But avoiding one seems totally impossible.
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