Deltec Think About This Oil Is Not Gushing - Page 5

Think About This
INVESTMENT RESEARCH
So , in the short run the tightness in the market is obvious and could even get worse as the weather gets colder and refinery runs rise . But what about the medium and long term ? Much of the trade in oil takes place beyond this year , in the futures market . Longer term prices of oil suggest that supply and demand will return to balance , with prices trending back to marginal cost . But if investment in supply remains subdued these markets could be very wide of the mark . If they are , super normal returns across the industry could persist which would suggest many share prices in the sector may be very cheap indeed .
To answer the question about the direction of longer-term pricing we need a view on the supply beyond the next 12 months .
First let ’ s look at the industry whose remarkable genesis has flipped the US from being a net importer of oil to an exporter : onshore US shale oil . As it currently stands US oil companies have all but halted new drilling , prioritizing shareholder returns and paying down debt . Having been burned by the oil price collapse in 2014-2016 and then again in 2020 , investors are holding companies to their promise of capital discipline . Dividends and buy-backs are better rewarded than spending to increase production even after the recent surge in oil prices .
WTI CRUDE OIL FUTURES CURVE
85 80 75 70 65 60 55
50
12 / 21
04 / 22
08 / 22
12 / 22
04 / 23
08 / 23
12 / 23
04 / 24
08 / 24
12 / 24
04 / 25
08 / 25
12 / 25
04 / 26
08 / 26
12 / 26
04 / 27
08 / 27
12 / 27
04 / 28
08 / 28
12 / 28
04 / 29
08 / 29
12 / 29
04 / 30
08 / 30
12 / 30
04 / 31
08 / 31
12 / 31
Sources : Bloomberg , Deltec
This is why the recovery in drilling activity is modest , too modest even to sustain production at current levels . Shale oil wells decline at a very fast rate and therefore require constant drilling to replenish lost supply . We think the rotary rig count needs to be between 800-900 to lift production . The current count is 556 .
Besides , although US production has risen fractionally this year , the small increase in production we have seen comes from utilizing existing Drilled but Uncomplete Wells ( DUCs ), analogous to drawing down on inventories .
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