Oil capex: conviction Premium
The coming quarter should test the resolve of the most positively minded of executives
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our T&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights.
One first finds oil in the mind, noted a petroleum geology pioneer. After a couple of years trying to forget the whole damn business, it seems that oil executives would like to explore again. Indeed, according to analysts at Wood Mackenzie, commitments to major new oil projects — final investment decisions — should double to 20 this year. Crude prices surging to 18-month highs has clearly focused the industry’s collective mind.
Another group which had a rethink was Opec. In November it decided to cut back production in 2017 by 1.2m barrels a day. Saudi Arabia, agreeing with non-Opec Russia to influence world supply, likewise turned heads in the oil company boardrooms. Worldwide spending on exploration should rise 3 per cent this year.
Perhaps, but the largest oil companies, including Shell, Total and BP, have other bills to cover first. Shareholders will still want their dividends. Most international oil majors struggle to pay out and must often sell assets to do so. At the same time, those shareholders may not wish to see finance directors cannibalise the future of their respective companies for short term income; some production growth is needed.
Just ask the US exploration and production companies, perhaps the most serious threat to Opec’s plan. Drill rig counts are rising again, pointing to increased activity. Listed US explorers in Citi’s coverage, such as EOG and Anadarko Petroleum, will increase their direct capital spending (excluding that on infrastructure) by more than a third this year. This capex alone should lift US oil production by 900,000 barrels a day, most of Opec’s cut.
If anyone minds about this optimism from producers, an oil trader should. Net positioning on major exchanges suggests that bullish sentiment is at multiyear highs. For now there seems little sign that oil supply will fall.
The coming quarter should test the resolve of the most positively minded of oil executives.