Future Shock? | Russell T. Rudy Energy LLC
Some crude traders fear that we might be facing a long term oil supply shortfall given current trends. Back in November, OPEC and 11 other producing nations announced plans to cutback on production in an effort to shrink the global glut and increase prices. In response, prices jumped 20% and many producers hedged future production at these levels. However, improved prices incented domestic shale producers to ramp up drilling and production which in turn drove prices down to current levels. With prices where they are, even more producers have hedged production out to 2020.
Now we find ourselves in a good news/bad news situation. The good news is that at current prices oil companies are comfortable investing in future production. The bad news is that they are only interested in spending money on short-term low-cost shale projects with limited production lives. Very few operators are willing to invest in major projects that will provide production for the long term. Mike Muller with Shell International Trading and Shipping observes that with current and future prices depressed, major projects have been delayed. “You can count them on one hand”.
Ben Luckock with Trafigura Group Ltd. fears that this focus on short term shale projects could lead to a shortage as early as 2020. He concludes, “The low-hanging fruit on the short-cycle shale projects are being used now so I am more in this camp that says we are starting to see potential issues three or four years down the track.”
James Foster with BP Oil International strikes an uncharacteristic tone of optimism however. He notes that the oil price crash drove down costs for all projects, not just those related to shale. Consequently he does not feel that a future supply shortfall is inevitable. In fact, he feels that as a result of these cost reductions and relative price stability, operators might be willing to invest in projects that otherwise would not have received funding.
The irony here is that volatility provides the opportunity for trades to make larger profits.
To read the article in its entirety, please go to http://www.worldoil.com/news/2017/3/29/oil-traders-warn-supply-crunch-looming-as-project-spending-drops .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
