Behind the scenes of this bearish oil market, there is a powerful bull case brewing.
It might be a year or two before the talking heads start pushing it, since many big-name oil analysts are turning more negative on oil prices now. Their pessimism is due to the rapid growth of U.S. oil production this year (for example, Goldman Sachs’ sub-$40 oil price call in July 2017). But even as the bears focus on the U.S. production surge which could force oil prices down in the short-run, the underpinnings of a long-run bull case are coalescing.
For this post, I used intelligent search engine AlphaSense to develop the foundation for what may become the primary oil bull thesis by 2020.
There is only one country where investment in oil resources is growing materially in 2017: The United States.
The U.S. onshore oil industry is growing quickly in 2017, but this growth is occurring in a global vacuum of sorts. The rest of the world skipped the drilling recovery this cycle, even as U.S. producers have adapted rapidly to lower oil prices.
There are pockets of strength to be found around the globe, but they are the exception, not the norm. This uneven growth trend is unsustainable. Domestic supply growth alone cannot accommodate global demand in the long-run given its hydrocarbon mix, short-cycle nature, and export constraints.
Data-Driven and Field-Level Underpinnings
Here are the core tenants of the future bull case argument which is quietly forming, based upon data-driven and field-level insights derived from AlphaSense:
1) U.S. oil drilling growth is occurring in a global vacuum. The following Schlumberger slide depicts the difference in resource development trajectories between the U.S. and the rest of the world quite well.
In reality, Schlumberger’s phrase, “leading the recovery” is an euphemism. The international recovery is a no-show this cycle.
2) 2017 U.S. spending growth is strong. The rest of the world … not so much. To supplement Schlumberger’s slide, we used AlphaSense Sectors / Industries Filter to quickly evaluate the 2017 investment programs of about 50 U.S.-centric oil companies.
We found their capital budgets are expected to increase 45% on average this year. This compares to oil development investment programs that are expected to be flat-to-down in the aggregate outside the U.S. in 2017 and 2018.
3) Oil price trends suggest international growth isn’t coming back anytime soon. Oil prices have slipped back to the $40 – $50 range after trading in the $50s earlier in 2017. International activity was stagnant even when oil prices were trading in the $50s. If international oilfield activity was going to recover, the first half of 2017 would have been the time, but activity growth never got off the ground. Some of the government-backed oil companies that drive international oil development cannot justify oilfield investment growth sub-$50 oil given the impact lower oil revenues are having on government budgets and social spending.
4) Oilfield service providers are worried some international markets may never come back. Using AlphaSense, I found a Halliburton investor relations transcript from May 2017 showing some dramatic evidence of just how slow things are in oilfields outside the U.S. Halliburton’s CEO, Jeff Miller, said, “Some [countries] may never come back, just given the producing power of the Middle East, North America and probably in Russia will likely be more dominant. So, there’s some marginal markets that may not come back.”
What does all this mean for global oil supply in 2020 and beyond? In my view, if international under-investment continues for the next 2 years, we could be setting the stage for a meaningful global oil supply crunch in 2020, and beyond.
Even with all the U.S. oil production growth, the U.S. only produces 1/8 of the global oil supply (including crude oil, condensates, and NGLs).
If only 13% of a supply base is growing and the rest is flat to down while demand inches higher… well that’s a recipe for higher commodity prices in the long run.
It may be too early to form an investment case around this longer-term thesis, but be on the lookout for more chatter about this idea coming in the months ahead.