We Have Created a Significant Supply Gap in the Years to Come: Andurand

Pierre Andurand, one of the foremost prognosticators of the oil collapse, has declared the beginning of a bull run on oil prices that will likely span the next few years due to the impact on supply from current low oil prices.

In a January 2016 interview with Forbes, Andurand said: “The market did a lot to the downside but these prices are not sustainable. It looks like the oil market is expecting low prices for very long, but I don’t agree with that, I don’t think we are going to stay at this level for much longer. Most of the move down is behind us now.”

Crude futures, currently trading near $40 a barrel, will rebound to $60 to $70 this year and $80 in 2017, the chief investment officer of London-based hedge fund Andurand Capital Management LLP said in a recent newsletter to investors.

Currently, the 12-month strip price is $41.96 per barrel and the 24-month strip is $43.64 per barrel as of March 30, 2016.

Operational Measures

“Large spending cuts are taking a toll on operational maintenance,” according to the newsletter, which was dated February. “After having been in an oversupplied market we expect inventory draws to start in a few months and accelerate quickly.”

Oil producers around the globe have been stung by low prices and have worked tirelessly to cut expenses, reign in capital spending, decrease work forces, and retain liquidity with the industry’s signature hope for higher prizes on the horizon. This has resulted in decreased spending on new wells and new projects. Assets have been high-graded and less oil is being produced from non-core assets.

This has led to a shift in the production numbers coming from new oil fields and the increased depletion of reserves in existing fields. As David Demshur, CEO of Core Lab often says, “The decline curve never sleeps, and always wins.” Rystad Energy predicts that the depletion of existing oil fields will outpace new production in 2016, 2017, and 2018. This would mirror the sentiments of Andurand with regards to the beginning and acceleration of a supply draw.

In his March 30th “Energy Market Assessment,” Energy Directions President Mike Smolinski said, “The first release of world crude-oil production data for the month of December shows an increase, but it also indicates depletion is catching up with production growth.”

Last week, Bloomberg reported that Norwegian energy consultant Rystad Energy was calling for a balance in 2016. “About 3 million barrels a day will come from new projects this year, compared with 3.3 million lost from established fields, according to Oslo-based Rystad Energy AS. By 2017, the decline will outstrip new output by 1.2 million barrels as investment cuts made during the oil rout start to take effect. That trend is expected to worsen,” Bloomberg reported.

“‘There will be some effect in 2018 and a very strong effect in 2020’,” said Per Magnus Nysveen, Rystad’s head of analysis, adding that the market will re-balance this year. ‘Global demand and supply will balance very quickly because we’re seeing extended decline from producing fields’.”

rystad

OPEC leader Saudi Arabia has already achieved its objective of curbing supply growth from rivals, and its diplomatic efforts with fellow producers may be aimed at averting a price surge in coming years as production falls short of demand, according to the newsletter. Most members of the Organization of Petroleum Exporting Countries will meet with Russia on April 17 in Doha to complete an accord to cap oil production, an initiative that has helped revive prices.

“It is possible that the Saudis are now less worried about short-term downside risk than medium-term large upside risk,” Andurand wrote. The kingdom, which “does not want crude oil prices to spike,” has realized that the slump in later-dated futures prices “has created a significant supply gap in the years to come.”

 


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