Massive spending cuts by oil producers are bound to push oil prices upward
- 3 Aug 2016
- National Post – (Latest Edition)
- Jesse Snyder Global Energy Reporter
Capex cuts set stage for oil rebound
‘ The world is going to get tighter on crude’
Massive spending cuts by oil producers are bound to push oil prices upward, analysts say, despite recent concerns over high storage volumes that have battered international benchmarks for crude.
Futures contracts for West Texas Intermediate fell again Tuesday, closing below the US$40 mark — at US$39.51, down US55 cents or 1.4 per cent — fuelling concerns about how far prices would continue to plummet. The slide marked a roughly 14 per cent drop in value compared to the month prior. Brent crude fell US34 cents, or 0.8 per cent, to settle at US$41.80, after touching a session high at US$43.18
But amid the gloom, many analysts still see prices rebounding as companies continue to slash capital expenditures, ultimately causing supplies to taper off.
“Looking out a year or two from now, in my mind it’s the lack of investment and how that impacts supply,” says Martin King, the vice president of institutional research at FirstEnergy Capital Corp. in Calgary.
The investment bank estimates WTI will average US$46.83 in 2016, according to research notes, but will increase to an average US$ 60 during 2017. It estimates prices will average US$76.50 through 2019.
Global investment by oil and gas producers has plummeted in recent years, with the International Energy Agency estimating total capital expenditures will fall 16 per cent in 2016.
Capital spending cuts were even deeper in 2015, down 24 per cent compared to the year earlier, according to the IEA.
That massive amount of capital being pulled out of the market, despite growing inventory levels, will eventually push the market back into balance, King said.
“If you look out 24 to 48 months, supplies either will be growing very slowly or could still be in contraction mode,” he said.
“Stack that up against demand growth which is going to be average — it won’t be fantastic, but it is expected to grow — and the world is going to get tighter on crude oil supplies.”
In April t he consultancy firm Wood Mackenzie warned that deep cuts in capital expenditures could lead to an oil shortage of 4.5 million barrels per day by 2035.
Over the past two years the fall in spending has translated into lacklustre drilling activity, which appears to be below the level needed to replace current declines in production, according to some industry observers. According to data from U.S. oilfield services giant Baker Hughes Inc., the total number of active rigs in the world fell to 927 in June, its lowest in years.
Current market volatility is due in part to a “structural change in the oil market with the absence of OPEC,” which has caused widespread uncertainty over when markets will reach a balance, said Kevin Birn, a director at IHS Energy.
Birn also expect soil prices to remain volatile for the foreseeable future, but will gradually rise.
“We do think prices will get high enough to support new projects moving forward in the oilsands, but we also don’t expect to see something exciting anytime soon because of this volatility.”
Despite falling capital expenditures, recent data on crude oil inventories in the U.S. put a damper on price gains in recent months, raising questions over how quickly demand will soak up oversupply.
US storage volumes reached record highs for the month of May, according to the U. S. Energy Information Administration. Despite cuts in capital investment, those rising inventories could continue to propel oversupply fears and push prices downward in the near term, King said.
“Until we see some more pronounced downward movements in s ome of those levels I think the market’s going to remain a little freaked out.”
US crude oil storage levels for the month of May reached 1.235 million, compared to 1.232 million the month earlier.