Oil Price: A Ticking Time Bomb

The fall of oil prices have impacted the energy sector immensely as of late.

How immensely? About US $1 trillion dollars worth.

The 2015 to 2020 global upstream capital-spend is seeing a reduction of 22%, or $740 billion. When you add in cuts to conventional exploration investment, the $1 trillion mark is hit, as researched by industry research firm Wood Mackenzie. 

In the past two years alone, Wood Mackenzie estimates $380 billion in cancelled projects – projects that would have yielded roughly 27 billion barrels of oil and gas.

Investments – or lack thereof – have resulted in decreased production levels. Compared to expectations before the slide in oil prices, output this year will be 5 million barrels of oil equivalent a day lower, with the deficit widening to 6 million next year, Wood Mackenzie estimates.

The effect of this decreased production should help curb the oversupply, and when the glut is curbed, we may see an eventual rise in prices. A “ticking time bomb” effect is being created by all the reductions in oil supply while demand continues to rise by 1.2 million barrels per day each year and supplies continue to decrease.

As oil again dips to $40.00, companies are going to be forced to tighten their budgets further and leave projects undeveloped, which could cause even more of a dramatic swing from surplus to deficit, potentially causing an immense impact on oil prices. The stage is set for the market to tip into a supply deficit as early as the end of 2016, although not all analysts have the same opinion. Michael Hsueh, a strategist at Deutsche Bank AG, told Bloomberg, “We’re looking at a market that’s still in a very slow process of rebalancing and we don’t think that you’ll get a sustainable deficit until the second quarter of 2017, Those deficits are necessary to draw down global inventories, but that will still take until the end of 2018, it appears.”

Although the oil price continues to fall, it is important to note that TAG is still profitable and remains optimistic about the future. With no debt holding us down, we are staying true to our budget for FY2017 and look forward to working through our highly tactical short- and long-term goals, which include optimization of infield opportunities and a moderate amount of exploration drilling. Our goals are always focused towards increasing production, reserves, and maintaining the maximum amount of shareholder value. It is important for investors to remember that oversupplied markets today do not equate to oversupplied markets tomorrow, and when supply levels turn – so do oil prices.

Original article can be read here.