OPEC finds rare opportunity as Wall Street and green activists hamper competition
Through Javier blas at 05/30/2021
Saudi Energy Minister Abdulaziz bin Salman
LONDON (Bloomberg) – “This time is different” are perhaps the most dangerous words in business: billions of dollars have been lost betting history won’t repeat itself. And yet, now in the oil world, it looks like this time really will be.
For the first time in decades, oil companies are not rushing to increase production to chase rising oil prices as Brent approaches $ 70. Even in the Permian, the prolific shale basin at the center of America’s energy boom, drillers are weathering their traditional boom-and-bust spending cycle.
The oil industry is on the ropes, coerced by Wall Street investors demanding that companies spend less on drilling and instead return more money to shareholders, and climate change activists pushing against fossil fuels. Exxon Mobil Corp. is paradigmatic of the trend, after its humiliating defeat at the hands of a tiny activist throwing himself on the set.
Dramatic industry events last week only add to what appears to be an opportunity for OPEC + producers, giving the Saudi-Russian-led coalition more leeway to bring back their own production. As non-OPEC production is not rebounding as fast as many predicted – or feared based on past experience – the cartel will likely continue to add more supply when it meets on June 1.
Shareholders are asking Exxon to drill less and focus on getting money back to investors. “They threw money into the drilling like crazy,” Christopher Ailman, chief investment officer of CalSTRS. “We’ve really seen this company go down the hole, not survive into the future, unless it changes and adapts. And now they have to do it.
Exxon is unlikely to be alone. Royal Dutch Shell Plc lost a historic legal battle last week when a Dutch court told it to dramatically cut emissions by 2030, which would require less oil production. Many industry players fear a wave of lawsuits elsewhere, with Western oil majors being more immediate targets than state-owned oil companies that make up a large chunk of OPEC’s output.
“We are seeing a shift from stigma to criminalization of investing in higher oil production,” said Bob McNally, chairman of the Rapidan Energy Group consultant and former White House official.
Railroad car bogies next to a Royal Dutch Shell Plc logo on an oil silo at the Shell Pernis refinery in Rotterdam, the Netherlands on Tuesday April 27, 2021. Shell reports first quarter results on April 29 April.
While it’s true that non-OPEC + production is recovering from the 2020 crash – and ultra-depressed levels of April and May of last year – it’s far from a full recovery. Overall, non-OPEC + production will increase this year by 620,000 barrels per day, less than half of the 1.3 million barrels per day it fell in 2020. Supply growth forecast for the rest of the year “falls short of” the expected increase in demand, according to the International Energy Agency.
Beyond 2021, oil production is expected to increase in a handful of countries, including the United States, Brazil, Canada and new oil producer Guyana. But production will decline elsewhere, from the UK to Colombia, Malaysia and Argentina.
As non-OPEC + production grows less than global demand for oil, the cartel will control the market, executives and traders said. It’s a major break with the past, when oil companies reacted to rising prices by rushing to invest again, boosting non-OPEC production and leaving Saudi-led ministers Abdulaziz bin Salman a much more difficult balance.
So far, the lack of growth in non-OPEC + oil production is not showing much in the market. After all, the coronavirus pandemic continues to restrict global demand for oil. It could be more noticeable later this year and into 2022. By then, the Covid-19 vaccination campaigns are likely to bear fruit and the world will need more oil. Iran’s expected return to the 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 bridge the gap. The number of drilling in the United States shows how different the recovery will be this time around: it is gradually increasing, but the recovery is slower than it was after the last big collapse in oil prices in 2008- 09. Shale companies are keeping their pledge to return more money to shareholders in the form of dividends. While before the pandemic, shale companies reused 70-90% of their cash flow for other drilling, they now maintain that metric at around 50%.
The result is that US crude production has stagnated at around 11 million barrels per day since July 2020. Outside the US and Canada, the outlook is even bleaker: at the end of April, the North America’s old oil rig tally was at 523, lower than it was a year ago, and nearly 40% lower than the same month two years earlier, according to data from Baker Hughes Co.
When Saudi Energy Minister Prince Abdulaziz predicted earlier this year that “exercise, baby, exercise” is gone forever, “it sounded like a bold call. As ministers meet this week, they may dare to hope he is right.