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Bernstein: Oil May Jump Past $150 On Chronic Underinvestment

oil rig

A supply shortfall is lurking should major oil companies continue to underinvest in exploring for new oil reserves, and this “chronic underinvestment” is setting the stage for the next super-cycle that could see oil prices soar to $150 a barrel or more, analysts at Sanford C. Bernstein & Co said on Friday.

Investors clamoring for cash returns on their investments in lieu of increased capital expenditures may soon backfire, as new oil reserves may be unable to keep up with demand, according to Bernstein analysts.

“Investors who had egged on management teams to reign in capex and return cash will lament the underinvestment in the industry,” the analysts said in a note, as carried by Bloomberg.

“Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008.”

“If oil demand continues to grow to 2030 and beyond, the strategy of returning cash to shareholders and underinvesting in reserves will only turn out to sow the seeds of the next super-cycle,” said Bernstein.

“Companies which have barrels in the ground to produce, or the services to extract them, will be the ones to own and those who do not will be left behind.”

Related: Permian Bottlenecks Come At The Worst Moment

After the oil price crash of 2014, oil companies slashed exploration capital expenditure. Now that oil prices have recovered, those companies are looking to reward shareholders with dividends and share buybacks to show that they have successfully come out of the price slump.

The lowered capex in exploration, however, is depleting the oil industry’s reserves and reserves replacement ratios. According to Bernstein, the reinvestment ratio in the industry is the lowest in a generation, which is setting the stage for a super-spike in oil prices; prices may even beat the record of $147 a barrel from 2008.

By Tsvetana Paraskova for Oilprice.com

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  • Justin on July 09 2018 said:
    @Markp1950

    "Peak oil demand near 2020."

    Electric is the future but 2020 is far to close for that shift to occur.

    Oil consumption is comprised of vehicle use, boat use, airplane use, power generation, and consumer use.

    1. Boat and plane use of oil is steadily rising with an ever growing population and ever more connected world and there are no substitutes for either.

    2. Consumer use is holding steady. People are slowly using less oil per person but the continued population increase (16% higher by 2030) is offsetting those gains.

    3. Power generation is being reduced but this is a fairly minor use of oil.

    4. So that leaves vehicle use as the major swing of oil usage. In 2017 96 million vehicles were produced world-wide. 46 million vehicles were retired (world fleet increased by 50 million). 1 million of those were EVs (with the rest being internal combustion engines (ICE). The worldwide vehicle fleet is currently 1.2 billion but is forecasted to increase to 2.0 billion by 2035. So basically ICE vehicle numbers (and their oil consumption) will continue to increase until the world manages to produce 50 million EVs.

    So how fast can the world ramp up EVs, the charging network and the grid to support them? Even assuming an annual 50% increase by 2020 that only means 3.4 million EVs which is nowhere near the 50 million needed. At that crazy 50% annual increase it takes to 2027 to produce 50 million EVs (peak ICE vehicle level). Assuming a more gradual (and likely given the hurdles involved) 30% annual increase we are looking at 2032 for peak ICE fleet.

    So please explain how any of this shows "peak oil demand near 2020?"
  • Henry on July 09 2018 said:
    Oil will be $50 long before it will ever get near to $150. Oil has only risen on geo events and not much more.
  • Lee James on July 09 2018 said:
    I see a trend to more expensive petroleum production as tight oil becomes increasingly tougher to bring in and the politics of international oil gum up the works. High cost will lead to reduced demand. We shouldn't overly rely on oil. For a number if different reasons, home grown clean energy and avoided petroleum demand are our energy future.
  • Disgruntled on July 08 2018 said:
    "not one person is born into the world with a demand for oil...it's simply not a necessity for life."

    I guess that would be true if you're not going to use any electicity (natural gas predominately produces it now via turbine generation), nor any plastics (make sure you're born in a barn), and only eat the food that your family grows themselves (not anything that's transported to the locally convenient grocery story). Don't drink the water your municipality provides via the water treatment plant that either utilizes electricity or refined products fuel. Need me to go on?
  • David Jones on July 08 2018 said:
    It looks to me as if the current game by all oil industry interests (government as well as private) is to set a range for oil prices. Not too low so they can't make a profit, not too high so renewables and alternatives swarm the market. If prices start drifting up towards 100, I expect to see them do what they can to lower these. In my opinion, the good old days of letting oil go beyond 100 and remain there are over. If it does, it means the oil industry have lost all control over their product.
  • Richard Burdett on July 07 2018 said:
    The old saying... The only cure for high prices is high prices, the only cure for low prices is low prices.
  • Tom on July 07 2018 said:
    Neil, I agree with you. If $150 Dollar Oil was real, it would have lasted.

    It Didn't.

    Price stability is very important to the producer and the consumer. Both need to see value in the trade for a price to be sustainable.

    Tom
  • Hamayun Sikander on July 07 2018 said:
    I don't agree that 150 dollars per barrel is possible. This analysis is extremely wrong. Right now, think about 78 to 80 dollars per barrel which is more realistic but in current scenario, after seeing the pressure of Donald Trump and Saudi's giving importance to Trump orders, I see oil fluctuating from 70 to 76 dollars in the next 10 months.
  • Mamdouh G Salameh on July 07 2018 said:
    Nobody is paying enough attention to a fast-approaching oil supply gap probably by 2020. This is due in large part to an oil investment drought since the 2014 oil price crash. This is exacerbated by the fact that the rate of new oil discoveries is at its lowest level in more than 70 years.

    And by 2020, 15 million barrels a day (mbd) of new oil supply may be needed to meet a projected annual average rise in global oil demand of 1.70 mbd and also offset an annual natural depletion rate in global oil production estimated at 5% or 4.8 mbd, virtually equivalent to Iraq’s output.

    A lack of investment will cause oil production to decline steeply and 80% of the current new oil supply is needed to offset natural declines. The oil industry desperately needs new sources of oil, and they need new investors and technologies to find those sources quickly.

    In such a situation, it will be no surprise if oil prices hit the levels they reached in 2008, namely $147 a barrel by 2025 and we know what a disaster it brought on the global economy.

    Only a fair price for oil ranging from $100-$130 a barrel could encourage global investments. Such a price will be good for the global economy as it enables oil-producing nations to explore for new oil and expand their production capacities to meet global demand and also enables major oil companies to balance their books and invest in new projects around the world.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Vishwas on July 07 2018 said:
    Anything to boost oil price! Demand for diesel in China, Europe and America falling. The rate of falling demand will only increase. China fuel consumption reduced so the surplus being exported. China oil buy, thus, is not for internal consumption alone. Chinese fuel forced many refineries shed their market share. Where is the demand for oil? Only India will see increasing oil demand as it failed to capitalize on EV revolution.

    If Venezuela and Libya resume oil production to old level, oil prices will collapse.
  • Brian Bresee on July 07 2018 said:
    Unless the United States has a currency collapse, the suggestion of $150/barrel of oil is not founded in reality.
  • Neil Dusseault on July 06 2018 said:
    Here's a thought:
    $150+ oil AND very low demand for it.

    Suppose oil gets to that record high amount that every oil bull won't stop salivating over, only by the time the price gets there, consumers will have evolved away from oil via alternate forms of fuel and/or widespread use of mass transit relying on electricity derived from windmills and solar, etc.

    Therefore, traders (and producers) get their coveted price but really only the traders profit because in this scenario there will be very few buyers using it, aside from oil as a lubricant.

    It's more than just a possibility--in fact, traders can keep oil at or even considerably higher as the reality is that the market is separate from the actual supply and demand scenarios. Traders need prices to move one way or another in order to profit--and oil producers prefer it to be on the upside--whereas the world (end user of the underlying product) may have already moved on, realizing no one owes a producer anything--not one person is born into the world with a demand for oil...it's simply not a necessity for life.

    Finally, producers may realize that the market is not concerned with what exact number the price is (e.g., oil could be priced like gold at approx. $1,250/bbl). Traders don't care, they're concern is at what price did they enter the market and at what price did the exit at. Everything else is just numbers. Thus, it comes down to QUANTITY of barrels sold. Be careful of what you wish for: If you do get those prices, you may just not ever see the quantity in order to capitalize off it.
  • Markp1950 on July 06 2018 said:
    "“If oil demand continues to grow to 2030 and beyond"
    It won't. Peak oil demand near 2020. "high prices cure high prices" Solar/storage prices keep on falling. Unprepared become Kodak 2000.

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