Bloomberg
This time it’s different: outside of OPEC +, oil growth is stagnating
(Bloomberg) – “This time is different” is perhaps the most dangerous words in the business world: Billions of dollars have been lost betting that history won’t repeat itself. And yet, in the oil world now, it looks like it will really be this time. For the first time in decades, oil companies are in no hurry to ramp up production to chase soaring oil prices as Brent crude nears $ 70. Even in Permian, the fertile shale basin at the center of the US energy boom, drilling companies are resisting their traditional boom-and-bust cycle of drilling and instead giving more money back to shareholders and climate activists who are pushing against fossil fuels. Exxon Mobil Corp. is paradigmatic for this trend after being pushed onto the board by a petty activist who was humiliatingly defeated. The dramatic events in the industry last week only add to what turns out to be an opportunity for OPEC + producers. to give the coalition led by Saudi Arabia and Russia more leeway to bring back its own production. With production outside of OPEC not recovering as quickly as many expected – or feared based on past experience – the cartel will likely continue to add more supply when it meets on June 1. “Criminalizing” shareholders urge Exxon to do less drilling and focus on returning money to investors. “They dumped money like crazy,” said Christopher Ailman, CalSTRS chief investment officer. “We really saw that this company only went down the drain and didn’t survive into the future unless it changed and adapted. And now they have to. ”Exxon is unlikely to be alone. Royal Dutch Shell Plc lost a landmark litigation last week when a Dutch court ordered it to cut emissions significantly by 2030 – something that would require less oil production. Many in the industry fear a wave of lawsuits elsewhere, with Western oil companies being more immediate targets than the state-owned oil companies that make up much of OPEC’s production. “We’re seeing a shift from stigma to criminalizing investing in higher oil production,” said Bob McNally, president of Rapidan Energy Group advisor and former White House official. While it is true that non-OPEC + production is declining after the crash of 2020 – and the ultra-depressive levels of April and May last year – it is far from a full recovery. Overall, production outside of OPEC + will grow by 620,000 barrels per day this year, less than half of the 1.3 million barrels per day that fell in 2020. According to the International Energy Agency, the forecast for supply growth for the rest of this year “is nowhere near the expected increase in demand. Beyond 2021, oil production is likely to increase in a handful of nations, including the US, Brazil, Canada, and the new oil producer Guyana. But production will decline elsewhere, from the UK to Colombia, Malaysia and Argentina. With production outside of OPEC + growing less than global oil demand, the cartel will control the market, executives and traders said. It’s a big break with the past when the oil companies responded to the higher prices by rushing to reinvest, reinvigorating non-OPEC production, and making a much more difficult one for ministers led by Saudi Arabia’s Abdulaziz bin Salman Balancing act left The lack of growth in oil production outside of OPEC + does not register much in the market. After all, the coronavirus pandemic continues to limit global oil demand. It could be more noticeable later this year and into 2022. Until then, vaccination campaigns against Covid-19 should bear fruit and the world will need more oil. Iran’s anticipated return to the market will provide some of this, but more is likely to be needed. When that happens, it will largely be up to OPEC to fill the gap. One signal of how the recovery will turn out differently this time around is the number of US wells: it is gradually increasing, but the recovery is slower than after the last major oil price crash in 2008-09. Shale companies are sticking to their promise to return more money to shareholders through dividends. While companies spent 70-90% of their cash flow on further drilling before the pandemic, they are now holding that metric at around 50%. The result is that US crude oil production has flattened at around 11 million barrels a day since July 2020. Outside the US and Canada, the outlook is even bleak: at the end of April, the number of drilling rigs in ex-North America was 523 lower than before a year and almost 40% less. Two months earlier, according to data from Baker Hughes Co. When Saudi Energy Minister Prince Abdulaziz predicted earlier this year that “‘drill, baby, drill’ is gone forever,” it sounded like a bold call. When ministers meet this week, they can dare hope he’s right. More stories like this one are available on Bloomberg.comSubscribe now to stay one step ahead with the most trusted business news source. © 2021 Bloomberg LP
Comments are closed.