03 Nov $120 Oil? Nope…
Bank of America last week is predicting Brent will go up to $120 a barrel in Q2 2022. Main reasons stated were current supply chain problems and an uptick in demand from China. Other reasons are the Administration lack of financial support for the entire industry despite uptick in product demand coming out of Covid.
Let’s get to why we don’t see $120 oil…
· Distribution: We believe both infrastructure and export chains will be pretty close to pre-Covid balances by end of April next year. Regulations are relaxing at ports to help break the gridlock and pipelines are still being built. The Permian solved their problems back in Q4 2019 and other large producing formations already have infrastructure in place.
· Investor $$ being swayed to go to “green” counterargument: The article states a “climate-inspired slowdown in investment in new sources threatens to allow reserves to wither”. I agree with that on larger production plays. The new Infrastructure Bill does have some sexy incentives for those who choose to go into the space with all of the incentives. However, on the market side, opinion-makers will ease escalation oil price predictions soon and potentially pocket a potential short. This will help keep most investment $$ rolling into the space in Q2, especially when confronted with actual demand. Renewables delivery and timelines to payout have much more accurate economic and depreciation models than past trends, and smart money always diversifies when presented with better data..
· Sellers get Greedy: For some reason, when oil hits $100, both undeveloped and producing leases go sky high in prices beyond what can be reasonably expected for small to medium developments/holds. Even hedge funds and large oil companies are wary of purchases in this space. They’ve held the bag too many times on buying oil at ridiculous prices for refined and unrefined product in the past to forget the beating they took on the market in less than a year typically. Deals simply disappear, which will eventually drive down market price, despite demand. Producers will simply squeeze more out of their current leases by developing PUDs and testing POSS.
· MOST IMPORTANT: Ramp Up Capabilities: Almost all domestic oil companies onshore (and small operators) have access to technology that can quicky extract both PDP and PUDs at near the lowest prices in history. You can ask Russia and OPEC about this from the run they tried to pull off a few years ago. Of course, we’ve been seeing labor and equipment shortages, but this has been the story for the past year, even at $50 oil. People and supplies will be back in the fold when the weather starts to warm up.
Quick takeaways: Reserves are plentiful, technology can push out product quicker and cheaper to take advantage of current demand pricing, smart $$ will diversify, and supply chain should be back to normal by June. Both demand and market price will be stable.
We’ve seen this all before in some form…
So why invest today? Because both buyers and sellers make $$ in the current market. Most operators we promote can make $30 oil profitable!
And…If you invest today in producing or development, and it goes to $120, guess who wins big?