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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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A Major Bull Run Is Forming In Oil Markets

The oil market is facing an unprecedented crisis as COVID-19 causes demand destruction and OPEC+ has proven powerless to stop oil prices from crashing. But behind what seems like an endless flow of bearish news, a new bull market is already forming.

CAPEX and OPEX cuts by nearly every oil and gas company on earth, forced by plummeting revenues, low demand, and brimming oil storage tanks, are the first step in what will likely become a roaring rebound in oil prices. Taking the devil’s advocate position, one could argue that the main long-term support factor for oil and gas prices is the current crisis. As global oil and gas majors, independents and NOCs announced major cuts and austerity measures, some bullish investors are already looking into the future.

As the global economy is slowly moving towards reopening, almost no one believes that demand or prices will shoot up later this year.  Optimism about an average $35-40 per barrel price may seem overly positive when markets are looking at a demand plunge to the tune of 30 million bpd in May.

Norwegian consultancy Rystad Energy’s forecast that around $100 billion is expected to be cut in 2020 from E&P budgets, is being painted as a negative development. The consultancy warned that if oil prices stay below $30 per barrel in 2021, the total cut could reach $150 billion. That is a staggering amount, but one that is supported by earnings reports from IOCs, such as Shell, that clearly show a sector on life-support. 

Related: Does Nuclear Power Have A Future?

Ratings agency Moody’s is a bit more optimistic, expecting a bounce in oil prices in the medium term. They forecast that oil prices in the long-term will range from $50 to $70 per barrel. In the short term, Moody’s is less optimistic and sees the effects of CAPEX cuts trickling down from E&P companies to oilfield service companies (OFS).

Dutch-British oil and gas major Shell announced this week the reduction of underlying operating costs by $3-4 billion per annum over the next 12 months compared to 2019 levels. The also announced a reduction of cash capital expenditure to $20 billion or below for 2020 from a planned level of around $25 billion. French oil major Total also has cut organic CAPEX by more than $3 billion, while planning savings of $800 million on operating costs in 2020, from $300 million announced earlier along with a suspension of its buyback program. American super major ExxonMobil already indicated further cuts are being planned. American giant ConocoPhillips has started to cut its 2020 capital program by approximately 10 percent or $700 million, while Chevron targets $2 billion in cost savings. And the IOCs aren’t the only ones suffering, with a financial crash in US shale, Canadian shutdowns, and of course the OPEC deal. 

All hope is being put on voluntary or government-enforced production shut-ins to shrink the oil glut and keep oil storage units from filling up. These measures, however, are not a feasible long-term strategy, as a total shutdown of 25-30 million bpd production is unrealistic. In a possible post-Corona environment most of the cut production will have to come back onstream. 

Despite the overload of bearish news, there is some reason for optimism. Not enough attention is being given at the moment to a major fundamental factor in oil and gas production. Investment levels in oil and gas have, for almost a decade, been much lower than is needed in a normal market. Serious underinvestment hasn’t gotten much attention amid negative price developments, OPEC+ conflicts, Trump tweets, and an economic global meltdown.

The main support for oil prices in the coming 12-18 months will likely come from the lack of investment in replacing maturing oil fields. Even in a doomsday scenario, in which demand in a post-coronavirus world could be lagging 10-15 million bpd behind 2019 levels until the end of 2020 or 2021, we will need more production to come onstream again. The financial destruction of US shale, North Sea oil and Canada, combined with a growing lack of investments in low-cost producing areas, will set the market up for a new perfect storm, this time resulting in a possible oil price shock to the upside.  Related: Shale's Decline Will Make Way For The Next Big Thing in Oil

Analysts should realize that zero investments in existing production could threaten a production decline of 6-12 percent per year. Although there are around 70,000 oil fields in the world, approximately 25 fields account for one-quarter of the global production of crude oil, 100 fields account for half of the production and up to 500 fields account for two-thirds of cumulative discoveries. Most of these ‘giant’ fields are relatively old, and many are well past their peak of production, a majority of the rest will begin to decline within the next decade or so and few new giant fields are expected to be found. The remaining reserves at these fields, their future production profile and the potential for reserve growth are therefore of critical importance to future supply. The continuing lack of investments, that started about a decade ago is one of the most important elements of today’s oil markets.

The shale bust may grab plenty of the media headlines, but most oil supply will continue to come from the larger fields. The combination of production destruction in non-OPEC oil and the natural oil field production decline rate is a toxic one. If the market does not recognize this and continues to underinvest, oil prices will shoot up much faster than most analysts expect. 2021 could be a very bullish year for oil. Investment reductions, lay-offs, and total shut-ins are major roadblocks for a speedy and functional supply recovery worldwide. A decade of investment deficits could be doing the rest. 

By Cyril Widdershoven for Oilprice.com

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Leave a comment
  • MadMax on May 03 2020 said:
    bulls already in trouble as Asian markets open for the week
  • Tom Kevlar on May 04 2020 said:
    Checkout Flightaware.
    More and more planes are in the sky now. This means demand is rapidly rising too.
  • Mamdouh Salameh on May 04 2020 said:
    If anything, the coronavirus outbreak and its destructive power of the global economy and the global oil market has proven irrevocably how inseparable oil and the global economy are by demonstrating that destroying one automatically destroys the other and vice versa.

    The global economy can’t reconcile itself with low oil prices because the main ingredients that make up the global economy, namely, global investments, the oil industry and the economies of the oil-producing countries, will all be undermined.

    While it is true that low oil prices could reduce the cost of manufacturing, thus helping the global economy to grow, it is a short-term benefit as this is vastly offset by a curtailment of global investment which forces companies around the world to cut spending, sell assets and make thousands, if not millions, of people redundant. High oil prices invigorate the global economy by stimulating global investments, enabling the global oil industry to balance its books and invest in new projects and also enhance the revenue of oil producers thus enabling them to eliminate their budget deficits and invest in oil exploration and expansion in production capacity.

    A fair oil price ranges from $100-$120 a barrel. And while we will not be able to get this price for at least two years from now, this price range should be target for both the global oil economy and the global oil market.

    The global oil industry has no alternative but to cut dividends drastically if it is to survive rather than sink under the weight of its outstanding debts. Royal Dutch Shell is already leading the way forward by cutting its dividends for the first time since 1945.

    The majority of OPEC producers need oil prices ranging from $85-$100 a barrel to balance their budgets.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Arch Region on May 04 2020 said:
    This is a reasonable conjecture. Bankruptcies will affect capacity. When world travel and driving internal combustion cars come online again, the shrunken capacity will need to grow back quickly to meet demand. Increased demand can only mean increased prices for the lucky ones who held onto their fossil fuel stocks. This is inevitable.

    The question is one of scale, how much and for how long will it last? While oil, coal, and natural gas are shrinking clean renewables are rushing in to fill the investment void. Is the imminent replacement of the fossil fuel economy an unrealistic chimera? Is it true that a streamlined fossil fuel extraction industry will still be needed past mid century having a reduced but vital role to play? Or is the imminent and catastrophic replacement of the fossil fuel economy unavoidable in the unforeseeable but very near term?

    Is a perfect storm brewing?
    1) Electric vehicles fleet replacement of the internal combustion engine cars?
    2) Large commercial airplanes running on hydrogen fuel?
    3) An overcapacity of inexpensive electric storage stabilizing the electric grid?
    And if so when will it happen? Will it take place in our lifetimes or down a few generations into the distant future?

    Global climate change has made weather prognostication more difficult, which means it is harder to predict perfect or imperfect storms.
  • Edward Kane on May 04 2020 said:
    In 2 -3 years from now hydrogen and electric will
    Have the upper hand on fossil fuels.
  • Anthony Gaskin on May 04 2020 said:
    What is your opinion on Marathon Oil?
    How do they seem to look coming out of this down turn in stock price and the sector epic downturn?

    Thanks
  • John L on May 05 2020 said:
    Bulls can run all they want, fact is nobody needs the oil. What a psychotic disconnect between reality and a memory of life now long gone.

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