Oil supply risks to fail to ramp up in line with demand returning
BAKU, Azerbaijan, May 29
By Leman Zeynalova – Trend:
OPEC+ supply management, including the recent commitments to reduce production by a collective 9.7 million barrels per day (b/d) in May and June, is a sign that OPEC, when pushed, will do what it takes to support oil prices, Trend reports citing Fitch Solutions.
This bodes well for attempts at the long-term management of prices via supply and will help prevent, or at least limit, damage to oil prices, the company said in its report.
However, these actions come at a cost, not just financially but also in terms of future supply growth, according to Fitch Solutions.
The company believes that one long-term implication that may play out is the impact of the rapid shut-ins of production at older wells and the impact that may have on mid-term production levels. “Depending on the reservoir conditions, some older wells may be difficult to restart, others may come back at a fraction of their pre-shutdown rates. If many older fields were targeted for early shutdown, there is a good chance these fields may not come back permanently. That would lead to a risk of supply failing to ramp up in line with demand returning.”
If this continues for a prolonged period (long enough to see current stockpile builds decline significantly), then upside price pressures could build as the supply deficit widens, reads the report.
“Our current supply growth forecast sees the next 10 year period falling well below historical averages of 1.1mn b/d of new supply growth annually. The recent deep and broad reductions in capex will impact mid-term production levels increases which in the best case will be only delayed if prices recover and future investment increases. Recent guidance from several oil majors reports that a good portion of the capex reductions have come from short-cycle projects. These projects target quick returns which, given stronger prices, could see new barrels come online in relatively short timeframes,” said Fitch Solutions.
The number of these types of projects has decreased in the last several years as these ‘easy wins’ became more of the strategic focus of rapid payback from high margin barrels, the company said. “A lack of low-cost high-impact projects in the pipeline highlights the need for larger exploration investments and more risk-taking related exploration and appraisal activities. Industry returns on capital employed will remain below historic averages if low prices continue to dominate the forecast period as we expect. Another area of investment to see cut backs are exploration efforts. “
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