While Brent crude oil prices have bounced back to above $US40 a barrel thanks to output cuts and the gradual easing of restrictions in big energy consumers like China and the US, the gathering pace of industry write-downs shows the wake-up call forced upon the industry by the upheaval of the past four months.
Energy industry executives have to be vocationally bullish to justify the allocation of billions of dollars of shareholder capital in long-dated projects. While expectations have been tempered, the industry is still eyeing a recovery in prices over the coming five years.
What’s interesting is the difference between the trajectory of oil prices assumed by energy companies such as Woodside and Origin, and oil traders.
Woodside sees a Brent oil price at $US65 a barrel in 2025, while Origin sees the global benchmark trading at $US61 a barrel.
But oil traders have 2025 oil futures trading around $US53 a barrel, or 13 per cent below Origin’s conservative forecast and 18 per cent below where Woodside sees prices in half a decade from now.
Not that the futures market has smothered itself in glory when it comes to being prescient about the future price of oil.
Five years ago, the futures market was pricing in a Brent oil price today of around $US71 a barrel.
Key to the recovery in oil prices have been the co-ordinated supply cuts among members of the Organisation of Petroleum Exporting Countries and Russia.
This week’s meeting of the cartel and its allies requires a choice between trimming production cuts and dampening oil prices, or not cutting and losing market share to US producers.
OPEC has taken a more upbeat view on the outlook for demand in its new oil monthly report.
It expects world oil demand to drop 8.9 million barrels a day in 2020 to a daily average of 90.7 million barrels a day.
It then expects oil demand to jump 7 million barrels a day in 2021, a historically high increase in global demand. China’s demand is expected to increase by 1.1 million barrels a day in 2021.
The bad news for the oil industry is that 97.7 million barrels a day is still short of the 99.67 million barrels a day recorded in 2019.
And oil bulls take note. OPEC warns its 2021 forecasts assume no major COVID-19 outbreaks, an optimistic display of conviction given the growing number of cases in the US.
There is one glimmer of hope for the bulls. The deep cuts to spending triggered by the crisis OPEC forecasts US shale spending of $US63 billion in 2021 compared to $US100 billion in 2014 may just deliver energy companies an upside surprise well beyond their forecast horizons.
The author owns Woodside shares.
More Stories
“Nobody is the reason for my death. My family is having to bear a lot of expenses because of me. I am a burden to them, my education is a burden to them….” A day after she wrote this note, Aishwarya Reddy, a student at Lady Shri Ram College for Women in Delhi…
Tom Brady’s arrival had the Buccaneers dreaming of an NFC South title, but the Saints showed the QB and his team they’re a far from being a contender.
Barnaby Joyce claims he told Malcolm Turnbull ‘others’ were having affairs