Oil Shortage Drives Prices Higher as Sources of Capital Remain Elusive Globally

Most energy analysts expect new record highs in global oil consumption this year. This includes the international energy agency (IEA), which just upgraded its 2022 oil demand forecast by 200,000 barrels per day, but the million barrel question: Where will the supply come from?

Don’t count on the U.S. shale patch. Drillers are holding back on adding new production, even despite the attractive returns available. Consider the numbers:

In 2019, oil prices averaged $57 per barrel. At the time, U.S. drillers deployed 774 oil rigs to produce an average of 12.3 million barrels of oil per day (b/d). Now, consider that in 2021, prices averaged a much more attractive $68 per barrel. However, last year U.S. drillers deployed just 380 rigs. That’s down 50% compared with 2019, resulting in U.S. production averaging just 11.2 million b/d in 2021.

In other words, despite a 20% increase in oil prices, the U.S. produced 1.1 million fewer barrels of oil per day last year versus 2019.  We can trace this all back to one thing: a lack of investment. Producing oil requires capital, plain and simple. And until more capital starts flowing back into the U.S. energy industry, don’t expect more oil to start flowing out.

Similarly, OPEC+ cut oil output by 9.7 million b/d following the COVID-19 outbreak. Now, with the global economy recovering, the group plans to restore 400,000 b/d of production each new month of 2022 until reaching pre-pandemic levels.  There’s just one problem: the group is already struggling to hit their output targets due to a lack of investment in many key OPEC+ countries. Have a look at the following examples:

Nigeria – one of Africa’s top oil exporters – missed its December production target by 460,000 b/d. And in Angola – another former top producer in Africa – oil production has fallen to a 17-year low due to underinvestment. 

Meanwhile, the IEA recently downgraded Iraq’s production capacity by 140,000 b/d, due to underinvestment. Even Russia – the world’s third largest producer – planned to boost production by 20,000 b/d in December, but instead suffered a 10,000 b/d drop in output. In total, OPEC+ undershot their December production target by roughly 60%, and the total shortfall is now 790,000 b/d below target. 

The Western backlash against fossil fuel investing is having ripple effects around the globe. That’s because a substantial portion of OPEC production has historically been funded by western supermajors. As Suhail Al-Mazrouei, the UAE energy minister, recently explained in a Bloomberg interview:

“The industry needs investment, through the involvement of international oil companies, in order to provide adequate supplies.. Failure to provide sufficient capital may lead to future price hikes.” 

Energy expert Julian Lee – who accurately predicted today’s OPEC+ production struggles months ago – recently explained:

“Persistent production shortfalls in countries like Nigeria and Angola are not the result of maintenance… rather, they reflect dwindling capacity resulting from lack of investment in exploration and development. So the shortfall will persist. In fact, it’s going to get worse, as more and more countries run up against capacity constraints and struggle to lift production.”

Many analysts have grown concerned that OPEC+ spare capacity could be much less than previously thought. Energy analyst Bill Farren-Price of Enervus recently commented in the Wall Street Journal:

“These monthly [OPEC] additions are increasingly nominal… They are not fully backed by real barrels.”

Morgan Stanley forecasts the world’s spare capacity will shrink from 6.5 million barrels a day a year ago to below 2 million barrels a day by mid-2022. That’s a tiny margin of error in a market where demand is expected to grow by roughly 4 million b/d in 2022, and another 2 million b/d 2023. 

With prices approaching $100 per barrel, the market is signaling the dire need for more oil supply. But until investors respond, prices will keep moving higher. This is a tremendous environment for the few remaining investors willing to allocate capital into today’s energy market.For more information on EnergyFunders’ current funds, have a look here. Ready to invest? Get started today!