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This time it’s different: outside of OPEC +, oil growth will stop

(Bloomberg) – “This time is different” is perhaps the most dangerous word in business: billions of dollars have been lost betting on history not repeat itself. And now, in the oil world, it looks like that time will really be. For the first time in decades, oil companies are in no hurry to ramp up production to chase soaring oil prices when Brent crude nears $ 70. Even in the Permian, the productive shale basin at the center of the US energy boom, drills are defying their traditional boom-and-bust cycle of spending. The oil industry is on the ropes, constrained by Wall Street investors demanding that companies spend less on drilling and instead give more money back to climate change shareholders and activists who fight fossil fuels. Exxon Mobil Corp. is a paradigm for this trend after a tiny activist has beaten himself humiliatingly. The dramatic events in the industry over the past week only add to what is turning out to be an opportunity for OPEC + producers. give the coalition led by Saudi Arabia and Russia more room to maneuver to bring back their own production. With production outside of OPEC not recovering as quickly as many expected – or feared based on previous experience – the cartel is likely to add more supply on June 1. “Criminalization” Shareholders urge Exxon to do less drilling and focus on returning money to investors. “They dumped money like crazy,” said Christopher Ailman, CalSTRS chief investment officer. “We really saw this company just go down the hole and not survive into the future unless they change and adapt. And now they have to. “Exxon is unlikely to be alone. Royal Dutch Shell Plc lost a major legal battle last week when a Dutch court ordered it to cut emissions significantly by 2030 – something that would require less oil production. Many in the industry fear a wave of litigation elsewhere, with Western oil companies pursuing more immediate goals than the state-owned oil companies that make up much of OPEC’s production. “We are seeing a shift from stigma to criminalization of investing in higher oil production,” said Bob McNally, president of Rapidan Energy Group advisor and former White House official. While non-OPEC + production is creeping back after the crash of 2020 – and the extremely low levels of April and May last year – this is the case a far cry from a full recovery. Overall, non-OPEC + production will grow by 620,000 barrels per day this year, less than half of the 1.3 million barrels per day that fell in 2020. The supply growth forecast for the remainder of this year “is nowhere near the expected increase” According to the International Energy Agency, oil production is likely to increase in a few countries, including the US, Brazil, Canada and the new oil producer Guyana. But production will decline elsewhere, from the UK to Colombia, Malaysia and Argentina. With non-OPEC + production growing less than global oil demand, the cartel will have control of the market, executives and traders said. It’s a big break with the past when oil companies responded to higher prices by re-investing, boosting non-OPEC production, and leaving ministers led by Saudi Arabia’s Abdulaziz bin Salman with a much more difficult balancing act on the lack of growth of non-OPEC + oil production is barely recorded in the market. After all, the coronavirus pandemic continues to limit global oil demand. This may become more apparent later this year and through 2022. By then, vaccination campaigns against Covid-19 should bear fruit and the world will need more oil. Iran’s expected return to market will provide some of that, but there will likely be a need for more. When that happens, it will largely be up to OPEC to fill the gap. One signal of how the recovery will differ this time around is the number of US wells: it is gradually increasing, but the recovery is slower than it was after the last major oil price crash in 2008-09. Shale companies are sticking to their commitment to giving more money back to shareholders through dividends. While the pandemic shale companies reused 70-90% of their cash flow for further drilling, they are now holding that metric at around 50%. The result is that US crude oil production has been flat at around 11 million barrels a day since July 2020. Outside the US and Canada, the outlook is even bleak: at the end of April, the number of oil rigs outside North America was 523 lower than a year ago and almost 40% down a month two years earlier, according to data from Baker Hughes Co. When Saudi Energy Secretary Prince Abdulaziz predicted earlier this year that “drill, baby, drill is gone forever,” it sounded like a bold call. When the ministers meet this week, they can dare hope he is right. You can find more stories like this on bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP



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