Big Oil's Latest Fear: A Price Shock After $114 Billion of Cuts

Eads, who as a deal-maker helped give rise to the shale age, is among many in the industry who have begun to point to a growing risk of diminishing spare capacity, the amount by which existing wells can increase global output if pumped at full speed.

Meeting Disruptions

It’s a closely watched figure in oil markets because it represents how much supply can be turned up to meet disruptions or demand increases. Continued Saudi production increases may “significantly” reduce spare capacity “at a time when oil markets will be tighter and geopolitical risks to supply are growing,” Pira Energy Group wrote April 14.

Not everyone is anticipating higher prices soon. BP Plc CEO Bob Dudley and Exxon Chairman and CEO Rex Tillerson said Tuesday that they see oil staying lower for years into the future. Dudley said “lower for longer” has become the company’s mantra.

Elsewhere, crude traders and hedge funds are beginning to see oil turn a corner. Prices can’t drop below $50 for sustained periods because that’s below the cost of supply, Ian Taylor, the CEO of Vitol Group, the world’s largest independent crude trader, said in an interview at the FT Commodities Global Summit in Lausanne, Switzerland on Tuesday. Andy Hall, CEO of commodities hedge fund Astenbeck Capital Management LLC, has also told investors that prices can’t stay low for long.

Outside OPEC

Beyond demand, supply outside of OPEC is one of the most important reasons for that. The collapse in crude prices has been so steep and so dramatic that most of the 200 major international oil and gas projects scheduled for final investment approvals in the next two years are susceptible to cancellation or postponement, said Nick Lowes, vice president of oil and gas consulting at IHS Inc. Sixty-six percent of those projects aren’t economical at current prices, he said.

In the long term, as further industrialization takes hold around the world and the global population swells to about 9 billion, energy consumption is expected to surge more than 50 percent in the next 20 years, according to BP.

Outside of some producing countries that limit access to their reserves, the industry has failed in recent years to find enough oil to replace lost production. Last year, the companies only struck enough oil for about 50 days of global consumption, said Tim Dodson, the executive vice president for exploration at Statoil ASA.

“The industry is struggling big-time to replace their oil resources and reserves,” Dodson said.

--With assistance from Kelly Gilblom in New York, Isis Almeida in London and Joe Carroll in Chicago.

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net. To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Carlos Caminada, Andrew Hobbs


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