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Why Oil Prices Can’t Stay Low For Much Longer

Oil Rigs

For many oil companies, the current downturn in oil is a back-breaker, but some have adapted to the falling prices and are fighting each day to survive and benefit from the higher oil prices that lay at the end of this dark tunnel.

In order to understand the prevailing glut, we have to go back more than a decade when investments into the oil and gas sector began to soar.

As seen in the chart above, the investments have multiplied from their lower levels to about $780 billion in 2014. The rise has been steady throughout, with the only dip coming in 2009. Such huge investments in a single decade resulted in the global oil supply increasing by 13 percent. During the same period, OPEC’s supply increased by 21.6 percent.

The massive amount of money being pumped into the oil and gas sector was due to the impressive gains in crude oil during that period. According to an analysis by the Zephirin group; between 2003 to 2013, WTI prices increased by 215.3 percent, whereas, Brent rallied by 276.3 percent.

However, demand failed to catch up with the breakneck speed at which oil was being pumped into the market. This ended with a massive oil glut, which has led to the worst oil crisis in decades.

There are a number of optimistic voices that point to a steep fall in investments from $780 billion to $450 billion in the past two years. They believe that soon the glut will shift to a deficit due to fewer oil discoveries and aging wells, which will boost prices higher.

“There is evidence that cuts in exploration activities have already resulted in a dramatic decline in new oil discoveries, dropping to levels not seen in the last 60 years,” said the IEA’s World Energy Investment 2016 report, reports The Telegraph.

However, a study by RBC Capital Markets expects new non-OPEC production of 2.16 million barrels a day to come online this year. In 2017, they expect an addition of 1.24 million barrels a day and for 2018, the figure is 1.58 million barrels a day. In 2019 and 2020, the additions are expected to subside to 680,000 barrels a day and 480,000 barrels a day respectively, reports The Financial Post.

With demand growth not looking very encouraging, the Zephirin Group’s Longdley Zephirin believes that the oil market “needs to collapse before it can improve,” reports Barron’s. Related: Why Iraq’s Oil Production Has Reached It Limits

However, does it mean that the investors should shy away from the oil and gas stocks? Not really.

“Based on a simple calculation, HSBC estimates that by 2040, the world will need to find around 40 million barrels of oil per day to keep up with growing demand from emerging economies,” reports Business Insider.

This means that companies that manage to survive this downturn will have decades of high oil prices to benefit from. There are a number of companies that are cutting costs, innovating, building relationships with clients and hedging smartly. Such companies will be the ones to survive the downturn, emerging stronger to reap the benefits of high oil prices when the cycle turns again.

Investors should therefore be on the lookout to invest in companies that have a strong balance sheet and are offered at reasonable prices, because oil prices will not languish at the current depressed levels forever.

By Rakesh Upadhyay for Oilprice.com

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  • BEH on September 22 2016 said:
    The numbers in the FP piece that is referenced above are either out of context or seriously incompetent.

    For 2016, the RBC report indeed projects an additional 2.16 MMBbl/Day production increase. This compares to the latest EIA monthly report estimate of a .42 MMBbl/Day decrease for non-OPEC crude liquids (reduced to .17 MMBbl/Day when including non-crude liquids).

    The comparison is similar for the 2017 production forecasts.

    The out of context explanation is they are reporting net-new wells while excluding declines from existing wells, though it's a huge item to omit. The incompetent explanation can only point to an agenda for RBC that I don't understand.

    oilprice.com is a respected news source, at least to me. I would expect a higher level of diligence prior to referring to a report like this one from RBC.
  • zorro6204 on September 23 2016 said:
    I don't buy it, I think you're using pre-shale cost vs. production relationships in a post shale world. And talking about oil use in 2040 is like predicting a buggy whip shortage in the 1920's from the perspective of 1880.
  • socaljoe on September 24 2016 said:
    Demand growth is about 1 mb/d per year. Depletion of legacy reservoirs is about 5 md/d per year. So we need to develop a new 6 mb/d every year to replace depletion and meet growing demand. In other words, we need to develop 150 mb/d of new production between now and 2040 (actually a bit more due to compounding demand growth rate over 25 years)... not 40 mb/d as stated in the article.

    By the way, it's not about exploration... we know where there is enough oil to last at least a decade... it's about developing known resources.
  • Barrack Obama on September 28 2016 said:
    When the speculators realize OPEC can't reinforce its production caps, the price of oil will come back down to Earth.
  • Doug on September 29 2016 said:
    This guy has a fly on his forehead.
  • Bruce Carlile on November 21 2016 said:
    You have included a nice look at oil/gas production, and the petroleum products derived, with it's demand. Don't forget to look at the domestic, shale play(s) decline. There is a certain amount of ongoing production matched with the natural production decline, that must be factored in. A lot of the Shale material comes on rapidly, and falls off quickly. Thanks
  • P K Dwivedi on December 03 2016 said:
    The demand of petroleum fuels is met by refiners and not by oil and gas producers. As long as refiners do not provide matching capacity for increased fuel demand (i.e. unattractive economic returns for new projects for capacity increase of the existing refineries or setting up of new refineries), availability of the oil (glut or shortage) would merely remain a play tool in the hands of oil traders.

    If refining does not catch up, the oil price may remain low for the same reasons that brought it to current value.
  • David Norris on April 22 2017 said:
    I have worked in the O&G field for a long time. Friends of mine tell me that the 3rd generation fracking has got the break even point down to $45/bbl at today's low interest rates. If oil goes above that, frackers go wild. Given how much oil shale is around, I don't see oil going much above $50 for decades.

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