Hard to believe that this time last year, the thought of oil reaching $70 for WTI (West Texas Intermediate) or even $80 for Brent, would have been ridiculed as the proverbial pipedream. But a combination of growing global demand and success of OPEC and several non-OPEC countries in reducing the global crude overhang, have provided the catalysts for oil’s remarkable rebound. The years since the ill-fated decision by OPEC to flood the world in oil in late 2014 and designed to arrest the rise of U.S. shale producers, may well be a thing of the past but their disruptive effect is likely to cost all more in the days ahead.
By all accounts the drop in oil prices in 2015 and 2016, crushed profit margins of producers and turned investors away from the sector en masse. The flight away from hydrocarbons was so severe, that few companies risked exploration and new discoveries of oil, dropping over 80% of activities in the face of risk. As a result, with oil quotas now enforced by OPEC members and its new allies, the world is almost certainly facing supply challenges due to years of neglect. It means that most of the oil used now isn’t supplemented by future reserves. As the world’s largest oilfields services company, Schlumberger pointed out recently’ “a significant increase in global exploration and production investment will be required to minimize the impending deficit.”
When geopolitical considerations, such as tensions from the civil war in Yemen and Syria, the Trump Administration’s threat to leave the Iran Nuclear deal, or when the collapse in oil production are factored in, there emerges widening concern for more crude price volatility ahead. Despite the ever-increasing rise in U.S. domestic shale oil, global demand is on track to consume more than this impressive bonanza can yield. For 2019 and 2020, the forecast suggests that demand will rise by 2 million barrels a day, a number that may be hard to meet given years of retrenchment and lingering fears that this oil energy supercycle could be an early sign of a bubble.
The near $20 hike in oil compared to last year appears to be at a crossroads in which further increases in prices could force an economic slowdown in growing economies. Conversely, it could be a manifestation that the world can indeed handle higher prices, if the alternative is to have none, given the years of capital expenditure neglect.
For oil, the future is indeed, tense.
