Fear Of $150 Oil Creeping Into Conversations

Exploration and production companies which cut expenditures beyond the bone in trying to remain solvent in the 2014-2016 timeframe, could see their cuts come back to severely impact crude prices.

The dearth of exploration is setting the stage for an unprecedented crude price spike, according to Sanford C. Bernstein & Co., Bloomberg reported. Companies have been compelled to focus on boosting returns and shareholder distributions at the expense of capital expenditures aimed at finding new supplies, analysts including Neil Beveridge wrote in a Friday research note, Kallanish Energy learns. That’s causing reserves at major producers to fall and the industry’s reinvestment ratio to plunge to the lowest in a generation, paving the way for oil prices to surpass records reached last decade, according to Bernstein. “Investors who had egged on management teams to reign in capex and return cash will lament the underinvestment in the industry,” the analysts wrote. “Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008.” The world’s oil supermajors, including Royal Dutch Shell, BP Plc and Chevron, navigated the price crash beginning in 2014 by cutting costs, selling assets and taking on debt to help satisfy investors with hefty dividends. The biggest super, ExxonMobil, was punished by shareholders earlier this year after compounding disappointing results with a massive spending plan and a lack of buybacks, Bloomberg reported. The oversupply of crude globally in recent years has masked “chronic underinvestment,” Bernstein said in the report. Oil has rebounded to the highest price in more than three years, as OPEC and its allies started reducing production by 1.8 million barrels per day (MMBPD) beginning in January 2017. Producers aim now to produce more crude to help cool the market, but disruptions from Libya to Venezuela are keeping prices elevated. Proven reserves of the world’s top oil companies have fallen by more than 30% on average since 2000, with only ExxonMobil and BP showing an improvement, helped by acquisitions, Bernstein said. Meanwhile, more than 1 billion people will urbanize in Asia over the next two decades and this will drive demand for cars, as well as air travel, road freight and plastics that also require oil, according to Bernstein. “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,” the analysts wrote, Bloomberg reported. “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.” Joseph F. Barone ShaleDirectories.com 610.764.1232 jbarone@shaledirectories.com www.shaledirectories.com

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