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Tim Daiss

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$80 Oil: Increased Investment Or Demand Destruction?

Amid all of the talk and conjecture of where global oil prices are heading, Shell CEO Martin van Beurden said yesterday that $80 per barrel is not an unreasonable price. When asked in a CNBC interview if he agreed with a statement from the OPEC-meeting this past weekend that the oil market is well supplied, van Beurden said “the market was a little bit tight in general, if you compare that to where we were a few years ago, the market has been tightening up.”

“Of course the market is well supplied, but not running out of oil at this point in time but it’s also fair to say that first of all volumes in storage have come down as spare capacity has been lower than it has been before so I think there is a bit of tightness coming in the market and you see that reflected in prices.”

When asked if that was why Brent crude was nearing four-year highs, he said that it’s part of the reason, but in the near-term crude prices are determined by sentiment and what is happening on the geopolitical scene “so it’s very hard to make predictions on it, but $80 oil [is] not an unreasonable price.”

Market uncertainty

Global oil prices are indeed trending upward based on not only supply and demand fundamentals, but also on geopolitical uncertainty. On the supply side, fresh sanctions slated to hit Iran’s energy sector on November 4 are already taking a toll, with predictions that as much as 2 million barrels per day (bpd) of Iranian barrels will be removed from global markets. There is also continued uncertainty over oil production in Venezuela, Nigeria and Libya - all OPEC members. Related: Shell CEO: $80 Oil To Boost Energy Infrastructure Investment

New sanctions against Iran also cross over in to geopolitical worries for oil markets as the U.S. as well as Iran’s regional rival Saudi Arabia and some of its Gulf Arab allies find themselves on opposite sides in the ongoing Syrian Civil War and fighting in Yemen as well as other issues.

Until this week both geopolitical uncertainty and supply problems seemed to be factored into global oil prices, now however, after producers that met in Algiers this weekend failed to commit to ramping up production, oil prices have a reasonable chance of hitting the psychologically and economically damaging $100 price point - a price at which demand destruction would kick in, if not sooner.

Many oil traders are already predicting $100 oil, in what appears to be a worst case scenario for both global consumers and the impact high oil prices have on countries that rely heavily on imports as well as finished oil products, including Japan, South Korea and India and to a large degree China. Oil has not reached the $100 per barrel since 2014.

With U.S. production now at around 11 million bpd, a dynamic unthinkable at the start of the decade, it seems surreal that prices could be poised for such a demonstrative move with the corresponding knock-on effect of spiraling prices Americans will pay for gas at the pump.

Predicting just when demand destruction, the point where high oil prices start to destroy demand, could commence is not an exact science since it’s based on several factors, including how consumers will respond. Yet, amid certain demand destruction as well as the impact of the ongoing trade war between the U.S. and China that will also hurt global economic growth thus oil demand, $100 oil will not be sustainable Related: Traders Turn Bullish Ahead Of Iran Sanctions

Higher oil prices needed

However, van Beurden said that higher prices may actually be needed.

“I think we need to have slightly elevated prices to bring new supply which is going to be the main challenge.”

Van Beurden is referring to declines in new oil production investment, with companies still feeling the pinch from the marked drop in global oil prices from 2015 through 2017 that caused oil producers to forgo the CAPEX intensive new projects that are needed to meet growing global oil demand that has now reached around 100 million bpd.

As far back as last year, state-run Aramco warned that the world might be heading for an oil supply shortage following a steep drop in investments and a lack of fresh conventional discoveries.

Unconventional shale oil and alternative energy resources are an important factor to help meet future demand but it is premature to assume that they can be developed quickly to replace oil and gas, Aramco CEO Amin Nasser said at the time.

“If we look at the long-term situation of oil supplies, for example, the picture is becoming increasingly worrying” he added.

Fast forward to this year, and these worries persist, as alluded to by van Beurden, yet if oil does indeed continue its upward swing, oil companies will again restart postponed or canceled projects.

By Tim Daiss for Oilprice.com

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  • JACK MA on September 26 2018 said:
    The petrodollar collapse in 2014 and associated dollar war against the BRICS nations has set up a oil super cycle that will send oil well over 150 because demand will never slow down as oil is inelastic in nature. Folks will buy LESS of everything else to adjust budgets to buy gas at ANY price. A massive oil shortage is on the way and those owning the right oil and gas companies will make fortunes from 2019-2025. Rate hikes are warfare against Eurasian nations thinking of joining the Silk Road Yuan based trading block but those same rate hikes will pop the shale 1/4 trillion debt bubble. The future is deep sea oil. IMHO
  • Dan on September 26 2018 said:
    No one likes to say those ugly words, depletion rate, but perhaps those two words should be the true price setting tool rather than a false supply number based on new rigs and demand based on a false belief in a never ending resource for below operational costs.
  • dryhole dutton on September 27 2018 said:
    demand destruction is a farce. energy is food. with a delta of 200,000 people entering the global eco-system every day, there is no logical way for demand to decrease.

    if jack ma is correct, and the future of oil production is deep water, we are all screwed. fab yards have been closed; drillships have been cold stacked; engineers have been laid off en masse. even if capital funds started flowing today, it would take several years to assemble competent teams to design the necessary structures so as to exploit sub-sea reserves.

    prior to the insanity of shale oil (lease condensate), sufficient excess capacity existed to serve as a buffer for the inevitable supply disruptions which plague the industry. production of large volumes of unsellable lease condensate resulted in storage facility shortages which decimated global oil price. the resultant lack of capital investment will plague the industry for years to come. as shale reserves are depleted, and global demand continues on its immutable track, the lack of conventional oil infrastructure spending will result in supply shortages of possible catastrophic consequence.

    the so-called analysts at oilprice know nothing of what is involved in the production of oil reserves; they even less of what is involved in the precursors of rising/falling markets as diametrically opposed positions are promulgated with equal enthusiasm, and verve.
  • snoopyloopy on September 28 2018 said:
    Demand destruction is definitely coming at $100, but it won't be quite the same drag on the economy due to the availability of electrics.

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