There's a new paradigm in private oil markets: Discipline.
The pandemic was a shock to an industry that's already bruised. Combined with ESG investing and governments that are unsupportive to drilling, the industry has moved rapidly towards deleveraging and returning capital to shareholders.
The results of that could be disastrous.
Saudi's energy minister is warning that oil markets could be headed for a dangerous period. He said Saudi Arabia will be one of the few countries to raise production in 2022.
In his long term outlook, he said oil will make up 28% of energy demand until at least 2045, compared to 30% now. That's a minor change in the face of growing global GDP and oil demand from emerging markets -- particularly India and China.
Contrast that with low oil investment, which he said at current levels will cut global output to around 80 million barrels per day from 100 mbpd currently.
What many investors miss is that it takes ongoing investment to keep the oil market supplied. Conventional production falls a 4-6% annually and needs to be replaced. At current investment levels, that's not happening and could leave the market materially short supply in one of the most inelastic commodities in the world.
To me, the only way that we see more investment in oil is materially higher share prices from oil companies. Otherwise, they're simply going to use the excess cash flow to buy back shares, pay down debt and pay dividends.
If that discipline holds, it's a recipe for $200 oil.
Today, WTI is down 29-cents to $71.39 as omicron worries percolate.
