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Suppy Deficit 2021?

What a difference a year makes.  Or for that matter, a few months.

For the last two years, everything we have seen and read has been about how the world is awash in oil.  Too much oil.  Too much production.  And for the short-term, that may be true.

But that tune is a changing.

At the beginning of this crisis, then Saudi Oil Minister Ali al-Naimi warned that oil companies should continue to invest in new, big projects. Otherwise, over the long-term, the world might find itself short of oil

And in our last edition, in Ty's Take, I noted with some interest the comments from Paul Kilsgaard, CEO of Schlumberger, that we may be on the cusp of a sustained multi-year recovery.  His reasoning?  The world would move from supply surplus to supply deficit as the cuts in CAPEX over the last several years begin to finally catch up with us.

Even for the last few months, most of the news seemed doom and gloom.  And there is certainly still cause for concern: the quick resurgence of U.S. shale, substantially higher than predicted inventories, and a supply glut that doesn't seem to be dissipating at nearly the anticipated rate.

Yet, this week, we start to hear execs and regulators talking about a deficit by 2021. Really?

First, the IEA issued a new report this week that looks at the oil market over the next five years, and the agency warned that although shale drilling is coming back and the market is currently oversupplied, relentless demand growth will soak up all the excess. By the early 2020s, the market could be short of supply, resulting in a price spike. The IEA says the dramatic cuts to exploration spending over the past three years will result in too few barrels coming online in the five-year timeframe. OPEC will be stretched to its limits as demand soars.

Also this week, economist John Butcher of energy consulting firm Wood MacKenzie stated that he expects crude oil to broach deficit territory by 2020, after which prices will rise steadily if a supply gap of about eight-million barrels a day cannot be filled with new projects.

 

These sentiments were echoed by John Hess, CEO of Hess Corporation, who said oil prices are expected to start rising from 2018 onwards as capacity peaks in the next few years.

He furthers said a supply crunch "may be brewing over the next several years" said a supply crunch "may be brewing over the next several years" due to the decline in investment resulting from global price collapse

And many executives including the head of Total, Patrick Pouyanne, and Eni's Claudio Descalzi as well as the IEA have predicted a crunch by 2020, based on low levels of investments in new projects.  John Watson, CEO of Chevron, similarly warned that new investment was needed.  

 

In fact, the IEA seems to be pretty insistent about it.  Fatih Birol, the executive director of the IEA, said that investment in oil needs to rise in 2017 by 20% from 2016 in order to meet the rise in demand and natural field decline. "The first signals from oil companies are not very encouraging in terms of future investments," Birol said in a press conference at a major industry gathering in Houston.     

Indeed, earlier this year, Saudi Aramco's CEO Amin Nasser told the World Economic Forum that $25 trillion is needed in new investment in oil-producing capacity over the next 25 years to meet growing world oil demand.  

Currently Wood Mackenzie sees E&P global spend rising about 3 percent in 2017 to around $450 billion. According to WoodMac’s Malcolm Dickson, ‘’companies will get more bang for their buck,” as internal rates of return jump from 9 to 16 percent, comparing 2014 to 2017.

            All told, the market sentiment seems to be turning from bearish to bullish. Of course, we have seen how unpredictable oil can be and that predicting its price more than 6 months to a year out is nearly impossible. Yet, it is undeniable that wells naturally decline and that new CAPEX is inherently necessary just to replace existing barrels coming out of production. Either way, the current optimism bodes well for the industry.

By: Ty Chapman

Five Star Metals, Inc.

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Ty's Take 3-10-2017
Notes From CERAweek Conference