Through Alex longley to 24/10/2021
(Bloomberg) – Could the era of cheap oil supply be over for good? That’s the conclusion of some of Wall Street’s biggest commodity desks, where banks have raised their long-term price forecasts, often by $ 10 or more.
While the American shale boom has sparked a âlower for longerâ mantra, the market is now obsessed with climate change and the declining appetite to invest in fossil fuels. Instead of increasing supply, companies are under pressure to limit spending, causing structural underinvestment in new production which – the argument goes – will keep oil prices higher for longer.
“My advice to customers is that you want to stay long on oil until you know where that break-even price is” which is bringing new supplies online, said Jeff Currie, head of materials research. firsts at Goldman Sachs Group Inc. “We know it’s above those levels because we haven’t had a big increase in capital spending and investments.
The notion of supply gap is not new. Since the price drop in 2014, analysts have raised the possibility that demand exceeds production due to underinvestment. But the energy price rout due to Covid-19, combined with pressing environmental concerns, offers reason to believe this time is different.
The number of oil and gas drilling rigs around the world may have recovered from lows when oil prices turned negative last year, but they are still down more than 30% from at the start of 2020. The current numbers are about as low as in 2016, according to Baker Hughes Co., despite crude prices nearing their highest level in seven years.
Among banks that see higher prices for longer, Goldman says $ 85 for 2023. Morgan Stanley has raised what it calls its long-term forecast from $ 10 to $ 70 this week, while BNP Paribas sees crude at close to $ 80 in 2023. Other banks including RBC Capital Markets have raised the prospect of oil being the start of a structural bull run.
Such estimates imply that a product vital to the world economy has become structurally more expensive. Oil price expectations underpin hundreds of billions of dollars in stock valuations for large international oil companies like Royal Dutch Shell Plc and BP Plc.
There is also a weaker and weaker appetite for lending on the part of investors. Just last week, France’s biggest banks announced they would curb funding for the shale oil and gas industry from early next year. Ecuador recently had to double the number of banks that could provide it with credit guarantees, as financial institutions avoided the crude harvested in the Amazon.
Not everyone supports the idea that prices can stay at high levels. Citigroup Inc. said in a report this month that crude below $ 30 and above $ 60 looks unsustainable in the long run. An extended price above $ 50 could add 7 million barrels per day of additional supply, the bank’s analysts, including Ed Morse, wrote in a note.
âOver the medium term, cost metrics still point to a fair value range of between $ 40 and $ 55 per barrel,â they said.
But others are seeing a changing wind, especially given the changes in the United States, which have indeed become a swing producer in recent years.
On the one hand, listed US shale companies remain constrained in output growth. When EOG Resources Inc. said in February that it planned to increase production, its shares fell the most against any company in the S&P 500. There has been little, if any, similar comment from the share. producers since.
At the same time, the impact of field declines is becoming clearer. In November, the Permian Basin was the only US onshore field to show significant year-over-year production growth. All others were either flat or falling, according to a report by the Energy Information Administration.
Likewise, while some of the major OPEC + producers find themselves with slack capacity to draw on next year, others, including Nigeria and Angola, are already showing signs of difficulty in scaling up further. the production.
“People have become very comfortable with the idea that the shale will be there and we are not limited in resources,” said David Martin, head of strategy for the commodities office at BNP Paribas. “It’s a question mark in my mind.”
And in a world spending less money on fossil fuels, questions then turn to demand, which doesn’t look like it will peak anytime soon.
The International Energy Agency said earlier this month that spending on fossil fuels falls short of needs if current growth in demand continues. He only sees demand for oil starting to decline in the 2030s under current policies. However, Morgan Stanley estimates that the supply could stop growing by 2025, leaving a large gap.
“We are operating at net zero investment levels, while at the same time demand is not following the net zero path,” said Martijn Rats, oil strategist at the bank. “Demand will be over 100 million barrels per day for the rest of the 2020s, but on the supply side, we’re not going to produce that with current investment levels.”