Total global oil production could decline for the next several years in a
row as scarce new sources of supply come online.
According to data from Rystad Energy, overall global oil output will fall
this year as natural depletion overwhelms all new sources of supply. But the
deficit will only widen in the years ahead due to the dramatic scaling back
in spending on new exploration and development.
Statoil says that global capex is set to fall for two years in a row, and
is on track to fall for a third year in 2017 as more spending cuts are
likely. "For the first time in history, we've seen cutting of capex two
years in a row and potentially we risk a third year as well for 2017,"
Statoil's Chief Financial Officer Hans Jakob Hegge told Bloomberg in a recent
interview.
"It might be that we see quite a dramatic reduction in replacing the
capacity and of course that will have an impact, eventually, on price."
Oil companies are making painful cuts to spending, which will translate
into much lower production than expected in the years ahead.
Although markets have dealt with the supply overhang for the better part
of two years, the surplus could flip to a deficit as early as this year, as
declines exceed new sources of production by a few hundred thousand barrels per
day. That widens to more than a million barrels per day in both 2017 and
2018. To be sure, there are extremely large volumes of oil sitting in
storage, which will take a few years to work through. That will prevent any
short-term price spike even if depletion surpasses new production. But
Statoil's CFO said the world could start to see supply problems by 2020.
According to a separate
report from SAFE, a Washington-based think tank, the oil industry has cut
somewhere around $225 billion in capex in 2015 and 2016, which will lead to
global supplies 4 million barrels per day lower in 2018-2020, compared to
what market analysts expected as of 2014.
Of course, these figures are not inevitable. A sharp rise in oil prices
would spur new investment and new drilling. In other words, deficits create
profit opportunities for drillers, ushering in new supplies. The price acts
as a self-correcting mechanism.
The problem is that, unlike many other industries, resource extraction is
extremely volatile, with supply responses very delayed. Many oil projects,
after all, take years to develop. Supply overshot demand, crashed prices, and
in response, supplies will undershoot demand in the next few years. The
industry has always suffered from booms and busts, and there is little reason
to think that it will change, at least in the short run.
But we tend to have a myopic view on what to expect. When oil prices go
up, people buy fuel efficient cars. When they go down, SUVs are back in
style. When the world is dealing with too much supply, market watchers
predict oil prices will stay low for years to come. If spot oil prices
suddenly rise, forecasts are revised sharply upwards.
Here's another example: the WSJ reports that oil prices are entering a
"sweet spot," a range between $50 and $60 per barrel that could
finally be good for the global economy - low enough to provide consumers with
a bit of a stimulus, but high enough to keep the industry and capital
spending afloat. Also, crude at $50, as opposed to $30, can provide a bit of
inflation to the deflation-beset economies in Europe and Japan. "Crude
between $50 and $60 would be the absolute sweet spot," Mark Watkins,
regional investment manager at U.S. Bank Wealth Management, told the
WSJ. "Everybody wins there."
That is all well and good, but who expects oil to trade between $50 and
$60 for any lengthy period of time? If there is one thing that we have
learned over the past two years, it is that nobody has a crystal ball on
prices. And if the industry indeed cuts capex for three consecutive years, at
a time when demand continues to rise, the one thing we can be sure of is more
volatility.