Coordinated effort to tame energy inflation doesn’t change the outlook of a substantial supply gap, says portfolio manager
Faced with pressure to contain energy prices that have been the main driver of surging prices, U.S. President Joe Biden recently announced a plan to release 50 million barrels of oil reserves, in concert with other countries including China, Japan, and the U.K.
While that could move the needle on the oil supply scale in the near term, it could represent just a drop in the very large bucket that would be needed to drastically alter the long-term supply outlook.
“Global oil inventories, both onshore and offshore, as measured by Kpler SAS, using satellite imagery, are currently at 3.5 billion barrels,” Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, wrote in a column published by the Financial Post. “This represents the lowest level in at least four years and is a deficit of 27 million barrels to the trailing 2017 to 2019 average.”
So far in 2021, Nuttall said, inventory levels have seen a 261-million-barrel decline, representing the fastest drop on record. Though he acknowledged the announced release of strategic petroleum reserves will spur gyrations in oil over the next few days, he dismissed it as “short-term noise.”
Despite a jet-fuel market that hasn’t quite recovered to pre-pandemic levels of demand, he said figures from BP PLC and oil-trading firm Vitol Holding SA both suggest global appetite for oil has recovered to around 100 million barrels per day. Meanwhile, OPEC+ isn’t straying from its plan to phase in 400,000 barrels per day in production every month between now and the end of 2022.
“U.S. shale companies, while having increased the amount of active oil rigs by 70 per cent since the beginning of the year, are doing so from extremely low levels and with a rig count of 461 — barely at levels necessary to maintain current production levels,” he said. “This anemically low level of drilling activity despite U.S. crude at US$76 per barrel is cemented by shale companies’ necessity to prioritize returning capital back to shareholders, rather than growing production on account of what I believe to be [a] permanent shift in mindset among energy investors and the companies’ owners.”
And while global supermajors may have enough capacity between them to change the story, Nuttall said they are continuing to prioritize decarbonization. There’s also the lack of sanctioned projects in recent years, which means any meaningful increase in supply from supermajors would have to come from new projects that have yet to be given the green light.
“In today’s era of decarbonization and ESG pressures, and where lead times on new projects are four to six years, I don’t see how investment can return to sufficient levels,” he said. “We remain in a multi-year bull market which will lead to all-time high oil prices.”
