By Bryan Livingston
The “lower for longer” price on oil may be near its end as demand rises in countries such as India and China, which could give rise to a potential squeeze on global supplies next year or in 2019 due to long-term decreases in capital spend by Big Oil and OPEC nations.
We believe China’s insatiable thirst for oil continues to be a positive for the future of the energy industry. China’s demands for oil are growing at more than double last year’s pace, but it’s difficult to know how much the country is stockpiling for the future. The World Bank recently revised upward its forecast on China’s economic growth —forecasting growth this year of 6.4% and 6.2% next year, which bodes well for future energy demands. Its previous forecast was for 6.2% growth in 2017 and 6.1% growth in 2018. We have noted elsewhere the ongoing growth in refining capacity in the country, set for major expansion over the next 24 months.
Independent oil trader Trafigura is among those bullish on future oil prices. Ben Luckock, co-head of Group Market Risk at Trafigura, told industry players during the recent Asia-Pacific Petroleum Conference in Singapore, that he’s especially bullish on India, the world’s fastest-growing oil consumer.
Due to rising demand, OPEC in its September monthly report revised up its forecast for 2017 global oil demand growth to 1.42 million barrels per day (BPD), an increase of 50,000 barrels. Next year, demand is expected to grow by 1.35 million BPD, an upward revision of 70,000 BPD.
Will a bull market take hold and stick around?
We realize that oil has struggled to stay above $50 a barrel for the past three years as a rise in U.S. shale oil production coupled with unfettered OPEC production flooded the market. (OPEC agreed to production cuts in December 2016 and has talked recently about extending them through next year.) Brent dropped as low as $30 a barrel in January 2016, but hit $59.02 on Sept. 25, a two-year high, before dropping back to the middle 50s. West Texas intermediate crude rallied on the same day, reaching a five-month high of $52.22.
Even if OPEC were to open the tap once again as it did when it sought to exert its dominance over U.S. shale production, it may not hurt future prices as the lack of capital spending over the past decade means some OPEC countries may already be producing at capacity. Research by Citibank’s Ed Morse suggests Libya, Nigeria, Venezuela, Iran and Iraq may already be at or near peak production.
Domestically, some U.S. shale producers, who ramped up capital expenditures in the spring, put the brakes on spending over the summer as oil prices slumped. This new round of fiscal conservatism is already slowing the rate of growth in daily oil production and should help to buoy the price of WTI.
To be sure, predicting what the price of oil will do in the near term can get you into trouble. However, we aren’t overly concerned that the oil price rally of Sept. 25 didn’t hold. Our view is that world demand for oil in 2018 and 2019 will be strong and sustained, with plenty of upside for producers and the energy sector companies that serve them.
Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy infrastructure.