The oil market is facing an unprecedented crisis as COVID-19 is destroying demand and OPEC + has proven powerless to prevent oil prices from collapsing. But behind what appears to be an endless stream of new bearishness, a new bull market is already forming.
The cuts to CAPEX and OPEX by almost every oil and gas company on the planet, forced by falling incomes, weak demand and full of oil storage tanks, are the first step in what will likely become a roaring rebound in oil prices. Taking the position of the devil’s advocate, it could be argued that the main long-term driver of oil and gas prices is the current crisis. While the world oil and gas majors, the independents and the NOCs have announced major cuts and austerity measures, some bullish investors are already looking to the future.
As the global economy slowly moves toward reopening, almost no one expects demand or prices to rise later this year. Optimism about an average price of $ 35 to $ 40 a barrel may seem overly positive when markets expect demand to fall by around 30 million barrels a day in May.
The forecast by Norwegian consultant Rystad Energy that approximately $ 100 billion should be taken from E&P budgets in 2020 is presented as a negative development. The council warned that if oil prices remained below $ 30 a barrel in 2021, the total decline could reach $ 150 billion. This is a staggering amount, but one that is supported by COI revenue reports, such as Shell, which clearly show an area of life-sustaining care.
Related: does nuclear power have a future? The rating agency Moody’s is a little more optimistic, expecting a rebound in oil prices in the medium term. They predict that long-term oil prices will range from $ 50 to $ 70 per barrel. In the short term, Moody’s is less optimistic and sees the effects of the CAPEX cuts being passed on from E&P companies to oil service companies (OFS).
Big Dutch oil and gas company Shell announced this week that it will cut underlying operating costs by $ 3-4 billion a year over the next 12 months from 2019 levels. The government also announced a reduction in capital spending to $ 20 billion or less for 2020 from a forecast level of around $ 25 billion. The big French oil company Total also reduced its organic CAPEX by more than $ 3 billion, while anticipating savings of $ 800 million on operating costs in 2020, against the $ 300 million announced earlier as well as a suspension of its buyback program. The US super major ExxonMobil has already indicated that further reductions are planned. US giant ConocoPhillips has started cutting its 2020 capital program by about 10% or $ 700 million, while Chevron is targeting $ 2 billion in savings. And the CIOs are not the only ones to suffer, with a financial crash in the United States, closings in Canada and of course the OPEC agreement.
All hope is placed on voluntary or government-imposed shutdowns to reduce the glut of oil and prevent oil storage units from filling up. These steps, however, are not a workable long-term strategy, as a total shutdown of 25 to 30 million barrels per day is unrealistic. In a possible post-Corona environment, most of the cut production will have to come back upstream.
Despite the overload of bearish news, there is reason to be optimistic. Insufficient attention is currently not paid to a major fundamental factor in oil and gas production. Investment levels in oil and gas have, for almost a decade, been well below what is needed in a normal market. The serious underinvestment has not received attention amid negative price developments, OPEC + conflicts, Trump tweets and the global economic crisis.
The main support for oil prices over the next 12 to 18 months is likely to come from a lack of investment in the replacement of mature oil fields. Even in an apocalyptic scenario, in which demand in a post-coronavirus world could lag 10 to 15 million barrels a day from 2019 levels until the end of 2020 or 2021, we will need more of production to return to production. The financial destruction of American shale, North Sea oil and Canada, combined with a growing lack of investment in low-cost production areas, will open the market to yet another perfect storm, this time causing a possible shock rising oil prices. Related: Shale’s Decline Will Make Room For Next Big Oil History
Analysts must realize that zero investment in existing production could threaten a decline in production of 6 to 12% per year. Although there are approximately 70,000 oil deposits worldwide, approximately 25 deposits account for a quarter of global crude oil production, 100 deposits account for half of production, and up to 500 deposits account for two-thirds of cumulative discoveries. Most of these “giant” fields are relatively old, and many are well past their peak production, the majority of the rest will begin to decline over the next decade, and few new giant fields are expected to be discovered. The remaining reserves in these fields, their future production profile and the potential for reserve growth are therefore of crucial importance for future supply. One of the most important elements of today’s oil markets is the persistent underfunding of investments, which began about ten years ago.
The shale bust could occupy many media headlines, but most of the oil supply will continue to come from the open fields. The combination of the destruction of non-OPEC oil production and the rate of decline in production from natural oil fields is toxic. If the market doesn’t recognize it and continues to underinvest, oil prices will rise much faster than most analysts expect. 2021 could be a very bullish year for oil. Investment cuts, layoffs and total closures are major obstacles to a rapid and functional resumption of supply worldwide. A decade of investment deficits could do the rest.
By Cyril Widdershoven for Oilprice.com
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