Oil: the fundamental outlook

Oil is a highly attractive commodity in the 2020s; and it will remain so in the 2030s, beyond the projected peak in demand, albeit not quite to the same degree.

Our previous post on the fundamentals of the oil market, published in February of 2017, was entitled “Last In, First Out”. That phrase paid homage to the industry’s oft observed ability to rebalance itself in a timely manner following the emergence of cyclical excess supply.

A large element of that previous edition of Prospects, perhaps inevitably so given operating conditions almost three years ago, was devoted to the cyclical impact of US onshore supply elasticity on global price dynamics. We expressed a view that core US shale plays would remain a key force in the determination of who would provide the marginal barrel to the oil market for another half–decade or so. That dynamic promised to cap prices for that period somewhat below where we saw the long run equilibrium. However, looking beyond the “shale moment” – which hindsight will probably demarcate as a disruptive decade from the first quarter of the 2010s to the first quarter of the 2020s – we stated that we saw “compelling market fundamentals” emerging beyond that time. Those fundamentals encouraged us to both invest and explore counter–cyclically. We sustained this approach through the low point in prices and the much more extended trough in deepwater capital and exploration costs. A disciplined approach to targeting our exploration efforts has led to a very competitive rate of discovery from these counter-cyclical operations.  The option set we have accumulated, and our broader liquids portfolio, is discussed in more detail here.

Our basic framework for oil attractiveness is summarised in the animation below.