First there was anxiety for oversupply of black gold and the unfolding crash of crude oil; then anxiety set in for price shocks in the not so distant future as a result of the crash.
Whether you believe crude oil is too cheap or still too expensive, one thing is certain: volatility in the energy space is here to stay. The fast and significant crash of oil prices in the last six months has many ramifications; not only it is affecting short term supply in the shale reservoirs of America but it forced large energy conglomerates to cancel or slowdown those mega projects with huge price tags and long development horizons. While shale production can be restarted relatively quickly, future supply linked to high cost developments does not have nearly the same flexibility.
The new worry is that a combination of increasing demand due to lower prices and future lower supply due to major Capex reductions will lead to substantial price shocks in possibly as close as three years. Bloomberg points out the growing risk of diminishing spare capacity; this figure represents how much supply can be quickly put on the market to meet disruptions or sudden demand increases. Recent numbers out of Saudi Arabia indicated how the Saudis are seriously leaning on their preferred strategy of market shares retention by pumping ever increasing amounts of oil in the face of collapsing prices. Such production increases could drastically reduce or even eliminate Saudi’s spare capacity.
Nick Lowes of oil and gas consulting firm IHS states on Bloomberg that most of the 200 major international oil and gas projects slated for final approval in the next two years could be cancelled due to the uneconomic contingency which makes 60% of them non-viable.
However, energy consumption continues to grow – 2015 global consumption is forecast to grow by one million barrel a day – and according to British Petroleum in the next 20 years we should witness a surge in demand of over 50%.
In the meantime, not only hedge funds and large energy conglomerates are focusing on acquiring energy assets but commodity trading houses are finding opportunities as well. Trading houses like Trafigura, Gunvor Group, and Mercuria Energy Group have started diverging from their usual commitments of trading only and are now investing in a myriad of assets including refineries, storage facilities and pipelines. In so doing they are also tapping alternative sources of funding (source: Bloomberg).
A new age in energy investing has indeed started.