BAKU, Azerbaijan, June 3
By Leman Zeynalova – Trend:
The concerted effort by OPEC+ to limit supply will see higher prices but muted levels of demand as the global economy heals from the Covid-19 shock will limit support for a return to prices levels seen from 2006 to 2015, Trend reports citing Fitch Solutions.
“If the agreement holds, OPEC+ supply management will support higher oil prices throughout the two-year agreement to mid-2022. There is a risk that US shale could return to higher levels of oil output if WTI prices rise sharply to above the Dallas Federal Reserve’s survey breakeven price of about USD50.0/bbl with some operators able to drill profitably at well below this level,” reads the report released by Fitch Solutions.
The company believes that OPEC+ and G20 cuts to production will support a restoration of market supply balance but they will come at a cost, not just financially but also in terms of future supply growth.
“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,” reads the report.
If many older fields were targeted for early shutdown, there is a good chance these fields may not come back permanently, according to Fitch Solutions.
“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,” the report says.
Lower oil and gas capital expenditures in the near term are set slow supply growth over the next decade adding upside pressure to prices, said the company.
“Cuts in 2020 capital expenditure will see many projects deferred to later years and new exploration shelved until higher oil prices are sustained. We expect investment to remain depressed over the coming several years and well below the zenith of oil gas investments in 2014 with oil prices set to remain well below the levels seen during that period. Supply growth is expected to be hobbled globally for several years as 2020 capital expenditure cuts limit new projects and slows development of those under construction,” said Fitch Solutions.
The company’s 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 shortterm drop in investment will add further price upside in the mid-term as upstream investment wanes and supply grow slows, increasing the likelihood of a return to the oil industry familiar boom bust cycle.”
---
Follow the author on Twitter:@Lyaman_Zeyn