Bernstein: Oil May Jump Past $150 On Chronic Underinvestment

Authored by Tsvetana Paraskova via Oilprice.com,

A supply shortfall is lurking should major oil companies continue to underinvest in exploring for new oil reserves, and this “chronic underinvestment” is setting the stage for the next super-cycle that could see oil prices soar to $150 a barrel or more, analysts at Sanford C. Bernstein & Co said on Friday.

Investors clamoring for cash returns on their investments in lieu of increased capital expenditures may soon backfire, as new oil reserves may be unable to keep up with demand, according to Bernstein analysts.

“Investors who had egged on management teams to reign in capex and return cash will lament the underinvestment in the industry,” the analysts said in a note, as carried by Bloomberg.

“Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008.”

“If oil demand continues to grow to 2030 and beyond, the strategy of returning cash to shareholders and underinvesting in reserves will only turn out to sow the seeds of the next super-cycle,” said Bernstein.

“Companies which have barrels in the ground to produce, or the services to extract them, will be the ones to own and those who do not will be left behind.”

After the oil price crash of 2014, oil companies slashed exploration capital expenditure. Now that oil prices have recovered, those companies are looking to reward shareholders with dividends and share buybacks to show that they have successfully come out of the price slump.

The lowered capex in exploration, however, is depleting the oil industry’s reserves and reserves replacement ratios. According to Bernstein, the reinvestment ratio in the industry is the lowest in a generation, which is setting the stage for a super-spike in oil prices; prices may even beat the record of $147 a barrel from 2008.

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ZH: It's not just Bernstein that is fearsome of this kind of squeeze. BofA's Global Commodity Research team see a $50/bbl premium (i.e.around a $120 price for WTI) in the shorter-term if Iran is fully cut off.

Trump may consider reducing Iran oil exports to zero...

President Trump announced back in May that the US would unilaterally pull out of the Iran nuclear deal and re-impose sanctions on Iranian oil exports. Yet, Iran represents about 5% of global oil supplies. Can the US Department of State avoid issuing waivers to some Iran oil importers? In our projections, we have just factored in a 0.5mn b/d reduction in Iranian output rather than the widely discussed "zero tolerance" policy. This is because we believe a complete cutoff of Iran exports would send oil prices up sharply just ahead of the US midterm election.

Moving from a 0.5mn to a 1mn b/d Iran export curb would push Brent prices up by $8 to $9/bbl, on our estimates. In our view, US sanctions could prove ineffective if rising oil prices largely make up for any lost Iran volumes.

...but Saudi has never pumped more than 10.6mn b/d

So could King Salman instruct Saudi Arabia to increase production and make up for any missing Iranian volumes? Perhaps. But going back to 1970, we observe that the highest annual average production recorded by Saudi was 10.4mn b/d in 2016. More recent history shows Saudi has never produced more than 10.6mn b/d on average over a single month.

And even in the recent period, we have observed a steep decline in domestic Saudi oil inventories. Thus, it appears the oil market has little confidence that Iran volumes can be easily replaced. Of course, dealing with a new set of Iranian crude oil export restrictions would be easier if other ailing OPEC+ deal members like Venezuela, Libya, Angola, Mexico, or Nigeria were able to simply maintain their production levels.

If Saudi can't fill the gap, demand may have to slow

With OECD oil inventories coming down and the oil market poised to remain in deficit, the core question here is if Saudi can fill the gap as the US increases the pressure on Iran. Alternatively, we may just face an episode of oil demand destruction, although a strong USD backdrop could set a lower oil price cap. In different words, it may be hard to see Brent trading a lot higher than $100/bbl if the EUR drops to 1.12, as our FX team expects.

How high could oil prices go from here? It may be complicated politics, but it is simple math. We estimate that every million b/d shift in S&D balances would push the oil price by $17/bbl on average. So based on those assumptions, we estimate zero Iran exports could push oil up by $50/bbl if Saudi caps out. We expect in this game of chicken, someone will blink before that happens.

Comments

DownWithYogaPants The Real Tony Mon, 07/09/2018 - 17:37 Permalink

That's just plain dumb.  Only an infant would think that.

If only money / power motivated Trump why not just sit back and enjoy your billions.   He already had power.

Way too much work involved to do it just for what you stated.   It's the microscopic people like Barry Obama or the Bushes that have that servant of the higher order cartel members mentality.

 

In reply to by The Real Tony

Snaffew LordWillingly Mon, 07/09/2018 - 15:11 Permalink

once again, another author assumes oil prices will surge amidst political turmoil and falling global demand as the global economy sputters. The US independently pulled out of the Iran deal they created and will punish Iran by imposing sanctions because the US backed out of the deal...huh?...wwwhha...wha...what?

In reply to by LordWillingly

Pernicious Gol… Snaffew Mon, 07/09/2018 - 15:42 Permalink

There was no US deal with Iran. There was a deal Barack Obama made, but didn't submit to the Senate for ratification. Every leader of other countries knows how the US government works. Obama hoped future governments would feel obliged to abide by his side agreement, but President Trump didn't do so. The Iranian government would have known the agreement was not legally binding on the US.

In reply to by Snaffew

Sudden Debt LordWillingly Mon, 07/09/2018 - 16:59 Permalink

Wait untill 2024 when you want to say it ;)

 

And oil prices won't spike, investments have been made, Russia has build it's entire oil infrastructure in the last decade, Iran will sell it's oil to Europe and America will use it's own oil, Mexican oil and the rest of south American oil.

 

there's more then plenty to go arround for the next 2 decades.

In reply to by LordWillingly

Son of Loki Mon, 07/09/2018 - 15:01 Permalink

I have always predicted we'll see > $150 oil again. Who knows when? Timing is elusive. Ask peter Schiff who is correct in his evaluation about gold and PMs but never gets timing correct.

silverer 1982xls Mon, 07/09/2018 - 17:15 Permalink

I hope it goes to $200. and higher. It's the only thing that will break the pattern of what's not working. We have lingered in the present system way too long. What's needed is to eliminate medical care, let the non-productive sector choke itself out and old people die the way they were designed to instead of billing millions to the survivors, then go back to basic farming. That would be a more sustainable forward path than where it is now. Where it is now is brought to the present by policies that have been proven to fail. Stay on this path, and failure is the future.

In reply to by 1982xls

Yen Cross Mon, 07/09/2018 - 15:02 Permalink

  These clown analysts just write this shit to stir the pot. They have no fucking clue, and just try to find what the sentiment is.

  Oil is gong to $30.00 before it goes to $150.00. lulz at these morons.

 How do you get $150.00 oil in a fucking depression?

adr Mon, 07/09/2018 - 15:02 Permalink

$150 oil would mean ZERO economic activity since it would become too expensive to produce and sell anything. We are already at the crippling point with oil at $74 since distillates are priced like oil is $125. $150 oil would give us $8 gasoline leading to $125 fillups. Commuting to work would become unaffordable for millions of people.

There is a reason for the lack of investment. Reality.

The fake fictionalized Wall St bullshit economy is not real. The race to trillion dollar valuations for the FANGS is backed by nothing.

Apple's real sales have been plummeting.

More than half of Facebook's accounts are fake.

Amazon and Netflix don't make money.

 

Either the stock market gets cut by 90% or all of a sudden people start getting paid four times as much without seeing a massive bout of inflation. Prices doubled and in some cases quintupled without a corresponding increase in wages. That is economic death.

divingengineer adr Mon, 07/09/2018 - 16:23 Permalink

It wouldn't mean zero economic activity. We've had $145/bbl oil before and the economy didn't grind to a halt.  Maybe if you had a really bad recession and still managed to manipulate the price up to $150 it would cause some pretty good impacts.  2008 and 2015 were both way over $100 and we lived.  

Now, having said that, it sure would be a drain on an already overtaxed, over charged and underpaid populace.  A precipitous drop in the markets, esp. the tech sector would be a welcome relief, the stock class gets exponentially more greedy as their wealth grows.  

But as far as oil exploration goes...why the fuck would you throw your money away on that when you could be buying back your own stock with 0% loans from your buddy at one of the GSIBs. 

In reply to by adr

shortonoil divingengineer Mon, 07/09/2018 - 18:44 Permalink

We had $147 oil for exactly one day. $150 oil for any period greater than that is absolutely ridiculous. The emerging markets are already collapsing with $74 oil, and that was planned. $150 oil would put the cost of oil's delivered energy to the economy at 0.0061¢ per BTU. It would cost 31 cents to hard boil an egg if you were using petroleum. The only reason that $74 oil is now sustainable for the DE is because it is being used to extract $4 trillion per year from the EM. Once that capital flow ceases oil goes to $40 or less, and the industry goes broke.

In reply to by divingengineer

Edward Morbius Mon, 07/09/2018 - 15:08 Permalink

$1,500/bbl would be just what the doctor ordered, not $150. Bicycle manufacturer's stock would soar, and obesity drop. Elon Musk would save the day with another great idea, like TSLA.

Righttoarmbears Mon, 07/09/2018 - 15:11 Permalink

Oil demand increasing? where did this optimistic looney get his crystal ball from?

China one of the biggest consumers is suffering a decline in demand and has bunkered so much, its struggling to find places to put it? and if its economy goes PHUT as is looking likely, demand will fall of a cliff, you wont be able to give the stuff away!!

MrNoItAll Mon, 07/09/2018 - 15:14 Permalink

The ONE AND ONLY reason that investment in new oil fields has so dramatically declined is because they've already scoured the entire planet surface including underwater and they know that there isn't anything left that's worth investing in. If it takes the energy in one barrel of oil to extract, refine and distribute one barrel of oil, then there isn't any point in extracting that oil. Modern high tech human civilization is so screwed.

IronForge Mon, 07/09/2018 - 15:19 Permalink

IRN and RUS won't be stopped.

Also, I don't think the IEX will allow for PX to spike up that much.

∴ Not going to happen for long, if not at all.

GoldmanSax Mon, 07/09/2018 - 15:26 Permalink

Underinvestment? The Nazis have old tech that can stretch oil way further than "modern" bullshit Detroit and Tokyo put out. They also have synthetic stuff that is better too. The world is swimming in oil. Asia, Cuba, Africa, North and South poles. C'mon, people, this is artificial scarcity.