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Oil industry faces its 'last hurrah'
When Joe Biden spoke during last year's presidential election about leading the US in a «transition from oil», he hardly expected to be asking the world's crude producers for more supply just 12 months later.
But the US president's administration has made repeated efforts to drive down oil prices in recent weeks. The members rejected Biden's pleas and stuck with a plan to add 400,000 barrels a day of supply each month, gradually restoring the huge swath of production it agreed. under US pressure - to cut last year to lift prices.
The president is right to be worried, say industry analysts and investors. «We've all decided that we want to stop investing in oil supply,» says Ben Dell, head of Kimmeridge, a private equity investor. «But nobody told the consumer».
Wil vanLoh, head of Quantum Energy Partners, one of the biggest oil-focused private equity firms in the US, says the world needs to be prepared for «triple digit oil prices».
Pump politics
A year away from midterm elections, the danger of further oil price inflation for Biden is plain. A gallon of petrol in the US now costs on average $3.40, according to the AAA motoring group half the price a consumer in the UK might pay, but 60 per cent more than during the final months of the presidency of Donald Trump.
Sceptical capital markets, environmentally-minded shareholders, government regulation and a fundamental doubt about oil's long-term future in a lower -carbon world are stopping investment, say oil market analysts. And it is happening even as demand roars back to life. Goldman Sachs says the start of a multiyear «structural bull market» is under way. But not all analysts agree. Fears of under-investment triggering supply shortages have been around for years without ever really coming true, says Bassam Fattouh, head of the Oxford Institute for Energy Studies.
The pandemic's silver lining fades
As the air quality in cities improved last year, a seductive notion emerged: that pandemic lockdowns had helped cure the world of its oil addiction. Governments could now «build back better», accelerating a pivot to the lower-carbon economy and making strides in the effort to halt climate change.
This time, however, there is little sign of consumers reacting to the higher price by cutting back, says Morgan T Stanley's Rats.
«We don't know where the demand destruction price is,» he says. Nobody is reacting to higher oil prices as they le might have done pre-pandemic, he adds. These trends are vulnerable to any Covid flare up, Iran nuclear deal or economic slowdown. But other factors are also pushing demand higher, say analysts. Record high natural gas prices in Asia, for example, have prompted some industrial consumers to buy oil for power generation instead.
Shale could come up short
Yet American shale producers, whose spectacular supply growth over the past decade made the country the world's biggest producer, have barely responded to the crude market recovery. From a high of 13m b/d in November 2019 almost 15 per cent of global production - - US output is expected to reach just 11.1m b/d in November. One explanation is the arrival of an era of capital discipline in a shale patch that was notorious for an addiction to drilling that wasted creditors' cash. Even now, as some shale producers pay chunky dividends and report bumper cash flows, investors remain wary.
«Everybody's going to be disciplined, regardless of whether it's $75 Brent, $80 Brent, or $100 Brent,» Scott Sheffield, 'We've all decided that we want to stop investing in oil supply.
Pressure to 'not invest'
The rest of the world may not have much new oil to yield either. From peak of almost $1tn in upstream capital spending in 2014, the total had fallen less than $400bn by 2020 and is forecast to remain below $500bn between now and 2025, according to Wood Mackenzie, a consultancy. It comes from officials."
It is also a product of companies' own failures, says Charlie Penner, who led the activist hedge fund Engine No 1 in a bitter shareholder proxy battle with Exxon earlier this year. In the very near term, it poses a dilemma for Opec. With shale producers unlikely to overwhelm the market any time soon, the group is now in control of prices. Biden's request for more oil from Saudi Arabia and its partners confirms as much, say analysts.
