The WSJ writes, frugal US and European oil-and-gas companies are making it easier for Saudi Arabia and Russia to fund their political maneuvers.
Doug Sheridan Opines
The WSJ writes, frugal US and European oil-and-gas companies are making it easier for Saudi Arabia and Russia to fund their political maneuvers. With recently extended voluntary production cuts, the Saudi-led OPEC+ are betting that Western producers won't respond to higher energy prices as much as they used to. So far, so good.
Even with oil trading above $90 a barrel, 11 fewer rigs were operating in the US on Sep 22 than one week earlier, and 134 fewer than a year ago. The likes of ExxonMobil and Chevron are under pressure to hand cash to shareholders after years of poor returns. Listed US oil producers are only reinvesting half of their operating cash flows, compared with 90% or more in the years leading up to the pandemic.
European giants Shell and bp are even less likely to respond quickly high prices as their projects, especially offshore, can take years to begin production. Record-high oil demand and lower-than-expected OPEC+ supply point to a shortfall of more than one million barrels a day in the last quarter of 2023.
Many analysts expect the oil price to rise above $100 in the near term. Looking ahead to 2024, an additional 1 MMBpd will be needed to meet demand, according to Bernstein. Supply from non-OPEC sources may only meet roughly half of this, so the world will rely OPEC+ to open the spigots.
Russia is under pressure too. Since the start of the war in Ukraine, the Kremlin's fiscal break-even oil price has risen to $114, from $64 before the invasion. Russia would have a lot to lose from a low oil price, which may explain why it has become more compliant with OPEC+ quotas in recent months.
All of this may have reassured OPEC+ that it can curb supply, even at unusually high oil prices, without losing as much market share as it did at the peak of the shale boom. It might be right. Provided there isn’t a big drop in global demand for oil any time soon, lower spending on new production by Western energy companies should boost OPEC+’s leverage.
To Sum It Up: Western oil companies hope fat dividends and share buybacks can boost their stock valuations. But the downside of their lavishing investors is becoming clearer—producers that put national interests first are increasingly running the show.
Our Take: This is a very reasonable scenario the WSJ has set forth. And we'd guess readers would do well to incorporate it into their thinking. But the contrarian lurking in us says demand response from US producers will be greater than expected if oil flashes $100 for an extended period of time—mostly because we suspect more producers are now thinking in terms of smart growth. And why shouldn't they be?
The WSJ writes, frugal US and European oil-and-gas companies are making it easier for Saudi Arabia and Russia to fund their political maneuvers. With recently extended voluntary production cuts, the Saudi-led OPEC+ are betting that Western producers won't respond to higher energy prices as much as they used to. So far, so good.
Even with oil trading above $90 a barrel, 11 fewer rigs were operating in the US on Sep 22 than one week earlier, and 134 fewer than a year ago. The likes of ExxonMobil and Chevron are under pressure to hand cash to shareholders after years of poor returns. Listed US oil producers are only reinvesting half of their operating cash flows, compared with 90% or more in the years leading up to the pandemic.
European giants Shell and bp are even less likely to respond quickly high prices as their projects, especially offshore, can take years to begin production. Record-high oil demand and lower-than-expected OPEC+ supply point to a shortfall of more than one million barrels a day in the last quarter of 2023.
Many analysts expect the oil price to rise above $100 in the near term. Looking ahead to 2024, an additional 1 MMBpd will be needed to meet demand, according to Bernstein. Supply from non-OPEC sources may only meet roughly half of this, so the world will rely OPEC+ to open the spigots.
Russia is under pressure too. Since the start of the war in Ukraine, the Kremlin's fiscal break-even oil price has risen to $114, from $64 before the invasion. Russia would have a lot to lose from a low oil price, which may explain why it has become more compliant with OPEC+ quotas in recent months.
All of this may have reassured OPEC+ that it can curb supply, even at unusually high oil prices, without losing as much market share as it did at the peak of the shale boom. It might be right. Provided there isn’t a big drop in global demand for oil any time soon, lower spending on new production by Western energy companies should boost OPEC+’s leverage.
To Sum It Up: Western oil companies hope fat dividends and share buybacks can boost their stock valuations. But the downside of their lavishing investors is becoming clearer—producers that put national interests first are increasingly running the show.
Our Take: This is a very reasonable scenario the WSJ has set forth. And we'd guess readers would do well to incorporate it into their thinking. But the contrarian lurking in us says demand response from US producers will be greater than expected if oil flashes $100 for an extended period of time—mostly because we suspect more producers are now thinking in terms of smart growth. And why shouldn't they be?