Re­mem­ber when oil reached $150 a bar­rel in 2008?

Zambian Business Times - - FRONT PAGE -

Oil in­vestors may re­gret urg­ing com­pa­nies to cough up cash now in­stead of in­vest­ing in growth for later as the dearth of ex­plo­ration is set­ting the stage for an un­prece­dented crude price spike, ac­cord­ing to San­ford C Bern­stein.

Com­pa­nies have been com­pelled to fo­cus on boost­ing re­turns and share­holder dis­tri­bu­tions at the ex­pense of cap­i­tal ex­pen­di­tures aimed at find­ing new sup­plies, an­a­lysts in­clud­ing Neil Bev­eridge wrote in a note on Fri­day. That is caus­ing re­serves at ma­jor pro­duc­ers to fall and the in­dus­try’s rein­vest­ment ra­tio to plunge to the low­est in a gen­er­a­tion, paving the way for oil prices to sur­pass records reached last decade, ac­cord­ing to Bern­stein.

"In­vestors who had egged on man­age­ment teams to rein in capex and re­turn cash will lament the un­der­in­vest­ment in the in­dus­try," the an­a­lysts wrote. "Any short­fall in sup­ply will re­sult in a su­per-spike in prices, po­ten­tially much larger than the $150 a bar­rel spike wit­nessed in 2008."

The world’s oil ma­jors in­clud­ing Royal Dutch Shell and BP nav­i­gated the price crash of 2014 by cut­ting costs, sell­ing as­sets and tak­ing on debt to help sat­isfy in­vestors with hefty div­i­dends. The big­gest, Exxon Mo­bil, was pun­ished by share­hold­ers ear­lier in 2018 af­ter com­pound­ing dis­ap­point­ing re­sults with a mas­sive spend­ing plan and a lack of buy­backs. The over­sup­ply of crude glob­ally in re­cent years has masked "chronic un­der­in­vest­ment", Bern­stein said in the re­port. Oil has re­bounded to the high­est in more than three years as oil car­tel Opec and its al­lies started curb­ing out­put at the be­gin­ning of 2017 to trim a global glut. The pro­duc­ers aim now to pump more to help cool the mar­ket, but dis­rup­tions from Libya to Venezuela are keep­ing prices el­e­vated.

Proven re­serves of the world’s top oil com­pa­nies have fallen by more than 30% on av­er­age since 2000, with only Exxon and BP show­ing an im­prove­ment, helped by ac­qui­si­tions, Bern­stein said. Mean­while, more than one-bil­lion peo­ple will ur­banise in Asia over the next two decades and this will drive de­mand for cars, as well as air travel, road freight and plas­tics that also re­quire oil, ac­cord­ing to Bern­stein.

"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," the an­a­lysts wrote. "Com­pa­nies that 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."

Brent oil ral­lied to a record high above $147 a bar­rel in 2008 as boom­ing de­mand growth and lack of read­ily avail­able re­sources fu­elled a syn­chro­nised surge across com­modi­ties that was dubbed the su­per-cy­cle.

The global bench­mark was trad­ing on Fri­day 06 July at $77.31 a bar­rel as of 9.06am in Lon­don, up about 60% in the past year.

Nige­ria oil. Pic­ture: REUTERS/AKINTUNDE AKINLEYE

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