Months of supply cuts and underinvestment are on the verge of reviving demand, as the arrival of a vaccine buoy hopes for a speedy return to normal. This is a perfect recipe for turning what is now an excess of oil into a market of scarcity capable of pushing prices high enough – over $ 65 a barrel – for exploration and production companies to start drilling again. .
After 10 months of forced layoffs and consolidations caused by pandemic shutdowns, higher prices would be welcome news for producers and oil service companies and their dependent refineries – not to mention much of Texas’ rural communities. , Louisiana, Oklahoma and Pennsylvania, which produce much of America’s traditional fossil fuels.
But a complete comeback will not take place overnight, despite the unbridled enthusiasm of traders. The US West Texas Intermediate (WTI) benchmark closed at $ 50 a barrel last week, for the first time since February, as vials of the new Pfizer vaccine began arriving in hospitals.
For now, oil consumption remains depressed as governments impose new travel restrictions to slow the spread of the virus during the holidays – a season that, in any other year, would be associated with higher demand for petroleum products. Gas prices are below $ 2 a gallon nationwide.
There is also a sea of oil in storage awaiting improved market conditions. World oil inventories are close to an all-time high of almost 3 billion barrels, and the extended OPEC alliance led by Saudi Arabia and Russia has a huge production capacity.
Forcing those bears back into hibernation will take time – as will inoculating the entire country against the coronavirus. But the potential for oil consumption to return to traditional levels before the supply is ready to satisfy 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 tightening capital markets and investor demand for higher returns.
Globally, oil and gas investment totaled about $ 880 billion in 2014. This year, investment is expected to be $ 383 billion, the lowest level in 15 years and an investment of 20 billion. % below 2019, according to energy consultancy Rystad Energy.
Exploration and production executives have been reluctant to make major investments, after being bitten twice by falling prices over the past five years. That weakness in the council chamber will not go away immediately.
But the market clearly expects the industry to return in the near future. Exploration and production companies have seen a flood of investment in the last six weeks, which has increased stock values by 50%.
The International Energy Agency (IEA) expects oil demand to return to pre-pandemic levels of 100 million barrels per day within 12 to 18 months. However, AIE analysts warn that if current levels of investment persist until 2025, about 9 million barrels per day of supply capacity will not materialize. This is about the amount of excess oil on the market now due to pandemic shutdowns.
ConocoPhillips chief operating officer Matt Fox recently told shareholders that up to 4 million barrels per day of supply could be lost in the coming years for the same reason. The shale sector – which has seen production decline by more than a million barrels a day to less than 7 million barrels this year – will find it difficult to fill the gap on its own if tight capital markets do not reopen, and they do not allow oil companies to invest.
All this adds to an image of supply demand, which is optimistic for US producers in 2021 and 2022. These factors will only determine the magnitude of the supply deficit. But avoidance seems utterly impossible.
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