Businesses do better with tailwinds at their backs, so it's not surprising that the energy sector hasn't been helped by the sharp pullback in crude. Since mid-to-late June, West Texas Intermediate (WTI) and Brent have pulled back over 12% from recent highs of around $106 and $114 per barrel (bbl), respectively. WTI has since breached $93/bbl, while Brent has broken below $100/bbl, with both looking at risk of further downside.

Human tendency can sometimes be such that we put less weight on adverse outcomes, which are dismissed as short-term factors, than we do on favored outcomes, which we label long-term trends. With that said, for the oil and gas industry, there appears to be a number of credible factors supporting a long-term trend toward strength in crude oil prices, even if making short-term calls on commodities is generally recognized to be notoriously difficult.

Ahead of its recent CEO Energy Conference, Barclays underscored that “the most significant change in the last six months has been the sharp rise in the long end of the oil curve.” This higher long-term price expectation for crude was flagged in this column last month. In its report, Barclays noted the December 2018 Brent crude contract has risen over $10 per barrel (bbl) since the start of this year, even as this ran counter to action at the front end of the price curve.

Geopolitical factors are cited for the move, including deteriorating security in Iraq, which had been expected to provide around 60% of OPEC supply growth in 2013 to 2019. The Iraqi developments “have choked the country’s potential to deliver on the few remaining sources of low cost crude,” said Barclays. “More expensive unconventional sources are being used as replacements, pushing the oil cost curve higher.”

But it is not only geopolitical factors that portend higher oil prices. Exploration results are also failing to measure up.

“If you look back on 2013, it was a record low year in terms of discovering new resources,” said Helge Lund, CEO of Statoil, speaking at a recent industry conference in Norway. “And year-to-date, it’s been around 4.4 billion barrels of oil equivalent, the lowest I have seen for decades.”

4.4 Bbbl? World oil demand in 2015 is estimated at 94.0 million bbl/day, or an annual rate of over 34 Bbbl, according to the International Energy Agency’s August report.

Tudor, Pickering, Holt & Co., which monitors "50ish Wells to Watch," points to a similar lack of success globally. “We have now seen 31 of our 50ish Wells to Watch for 2014 reach total depth with only one highly likely commercial success,” it said.

The latest update came as Statoil announced a dry hole at the Dilolo-1 exploration well in Block 39 offshore Angola in the Kwanza Basin. Considered one of the most material wells in this year’s program for Statoil, which held a 37.5% working interest, the Dilolo-1 would have led to substantial follow-on drilling opportunities had it been successful. TPH anticipated Statoil taking a writeoff of over $300 million for the dry hole.

“Dilolo-1 was one of the most highly watched wells for 2014 and is now the 26th dry well out of 31 completed wells on our global ‘50ish Wells to Watch’ list,” said TPH.

And exploration is not coming up short for lack of scouring the world for large prospects. Wells were reported dry or noncommercial in, among other places, Norway, Angola, Gabon, Cameroon, Namibia, Kenya, Morocco, Ethiopia, Mauritania, Malta, China, the Faroe Islands and New Zealand. Monitoring related to Iraq was limited to a Kurdistan well, also dry.

Meanwhile, national oil companies and the majors aren’t pushing hard to reach rising production targets. Instead--with the exception of their North America onshore assets--they “are content with their retreat to the comfort of capital constraint and their newfound value over volume introspection,” according to Simmons & Co. International.

So, while we sometimes hear references to “a world awash with oil,” given the short-term pressure on crude prices, the long-term trend may prove otherwise.

Indeed, one presenter at the conference in Norway was so concerned about the specter of rising oil prices that he warned the energy sector could over time succumb to competition from Tesla, the electric vehicle manufacturer, if costs aren’t held in check.

Hard words to accept. Especially when Tesla CEO Elon Musk recently conceded his company’s stock, touching $286/share, might be overvalued--in the short term, not the long term.

Comments