DESPITE reaching the low of $45 per barrel, oil prices may yet rise to $200.
This indication was giving on Monday by the Secretary-General of the Organisation of Petroleum Exporting Countries (OPEC) Abdulla al-Badri, when he was in London, the oil market doesn’t need to look for oil prices to bottom as the market has already bottomed. Instead, he offered quite bullish comments by saying, “Now the prices are around $45-$55, and I think maybe they [have] reached the bottom and we (will) see some rebound very soon.”
Abdulla al-Badri, however did not say OPEC would come in and rescue the oil market by reversing its previous decision to hold steady on production. Instead, he saw the signs that the oil market is self-correcting as oil companies have made deep cuts to spending, which would eventually lead to lower production growth.
Worthy of note is the plunging rig count in the US, which is usually a key to a bottom in oil prices. However, in the midst of cutting back as the industry works through the current oversupply, the Secretary-General is now warning that the industry is putting future oil supplies at risk by under-investing today.
Although the OPEC Secretary-General did not give a time frame for the rebound, he, however, noted the correlation between investment and future production, saying, “if you don’t invest in oil and gas, you will see more than $200” when it comes to future oil prices.
According to CNN, the reason for the foreseen rebound is because oil production naturally declines and oil companies need to invest in new production to not only replace this decline in production from legacy oil fields but to add new production to meet growing demand. However, oil companies are reluctant to invest in new production as their cash flows decline.
Over time this could become a problem as oil fields around the world naturally decline by an average of about five per cent per year, as seen in a chart from a Chevron Corporation (CVX) investor presentation, in order to overcome this decline oil companies need to develop about 200 billion barrels of oil supplies over the next decade and a half just to meet demand.
It added that these supplies would require the industry to invest $7-$10 trillion. However, with the big capital budget reductions, oil companies have announced, this year, that it could make it harder for the industry to meet future supply needs. In fact, the industry might defer up to $150 billion oil projects this year due to the collapse in crude prices. Many of these investments, however, would not have yielded actual production for a couple of years due to the long lead time of major projects.
Abdulla al-Badri further suggested that the cuts that oil companies were making could have a dramatic impact on future oil prices as the under investment has the potential to cause oil prices to rocket higher if demand grows faster than future supplies.
He, however, added that that would all be part of OPEC’s plan as it purposely pushed for lower oil prices now so it could control market share once oil prices surged in the future. “It’s willing to endure short-term pain for the potential of a big long-term gain,” he said.
