The decline of new oil and gas investments means the current oil glut's days are numbered, according to a new report from Merrill Lynch.
"Our analysis shows that the price elasticity of global oil supply is persistent over time, suggesting a multi-year output crunch ahead for both groups," Bank of America's investments wing explained, adding that it had found a double-digit drop in new ventures in members and non-members of the Organization of Petroleum Exporting Countries.
Since the initial oil price drop in 2014, OPEC countries have engaged in a war over market share, which led members to ramp up production even as prices struggled to recover.
"Global oil spare production capacity has dropped on rising OPEC output, and 2020 Brent and WTI crude oil prices have dropped, partly on fears that the cartel will keep growing its market share," the report said.
Merrill Lynch's analysts also found that the effects of fluctuating prices on demand fade as volatility becomes long term. A $15 per barrel price decrease sustained over 15 years will increase demand by only 1.7 million bpd total - or 110,000 barrels per year.
"Our estimates imply that it makes little sense for OPEC to invest aggressively to grow production from this point onward," they said. "We believe OPEC revenue will likely be higher if no additional investments are made."
OPEC members are scheduled to hold an informal meeting in Algiers this Wednesday to discuss the terms of an output freeze to revive the chronically low price of oil.
Energy markets have been particularly volatile leading up to the meeting, with OPEC's most cash-poor countries hoping for an extraordinary summit to be called during or after the unofficial meeting to finalize the terms of freeze deal.
By Zainab Calcuttawala for Oilprice.com
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Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on… More
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