The volatility in the crude-oil market is at a 28-month low but that complacency in the market may be short lived as the International Energy Agency warns of looming oil supply shortages over the next three years. This comes as Exxon Mobil (NYSE:XOM) makes a big investment in the coming U.S. oil boom as it plans to invest 20 billion dollars in the Gulf Coast creating 35,000 construction jobs and 12,000 permanent jobs as it seeks to position itself as the U.S. becomes a major oil and gas exporter. These are high-paying jobs, many of which will pay more than 100,000 dollars per year. The global energy landscape is changing and the coming oil boom is on its way and this time the White House will not get in the way.
Crude oil, along with other commodity markets, are locked in a very tight trading range. The market seems to be waiting for something to happen and for oil we can see the wheels turning. While in the short term the rise in shale-oil prices seems to have checkmated OPEC production cuts, the lack of investment in more traditional oil projects is creating the shortage of the future.
Yesterday, the International Energy Agency (IEA) Executive director Dr. Fatih Birol, warned of a shortage of oil in three years as reported by MarketWatch. Market Watch wrote, “The key takeaway from the IEA report is the “looming imbalance,” Matt Parry, IEA senior oil economist, told MarketWatch by email from Paris. A large potential supply deficit may take hold around 2020, “as demand growth is consistently forecast to outstrip projected increases in global oil supplies,” he said. “A net demand gain of 7.3 [million barrels per day] is forecast [for] 2016-22—vastly exceeding the projected supply growth of under 6 mb/d.” The IEA report said that demand and supply trends point to a tight global oil market and in 2022, spare production capacity may fall to 14-year low. For now, “we are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go,” Dr. Fatih Birol, the IEA’s executive director, said in a statement. “But this is no time for complacency. We don’t see a peak in oil demand any time soon. And unless investments globally rebound sharply, a new period of price volatility looms on the horizon. The IEA report said that demand and supply trends point to a tight global oil market and in 2022, spare production capacity may fall to 14-year low.
Exxon Mobil is also seeing that potential and is putting money into what will be the new U.S. dynamic as a major oil exporter. It was reported that Chairman and CEO Darren Woods has initiated a project called “Growing the Gulf”, an expansion plan that was mostly designed to create petroleum products for export from the U.S. to an energy hungry global market. In a press release Woods said, “We are using new, abundant domestic energy supplies to provide products to the world at a competitive advantage resulting from lower costs and abundant raw materials.”
While this is great news it comes after Exxon is putting half of its worldwide drilling budget to U.S. shale fields next year. Exxon Mobil is looking to expand in the U.S. with a friendly U.S. government and with the ability to increase and decrease oil production at a much lower investment point and less risk. While that is good for Exxon Mobil, it may not address the looming supply shortage that the IEA is talking about because even with massive investment in shale, it will not replace the more traditional projects that Exxon Mobil is walking away from. Woods also warned that wasted investment in high cost low return green energy projects have hurt. Woods was quoted as saying, “They are more expensive and lead to poor investment decisions, focused on the limitations imposed, not true innovation.”
Our base case for oil is the same as the International Energy Agency. We predicted last year that oil had hit a generational bottom and we are in a changing energy landscape. We predicted high OPEC compliance and we also are expecting and predicting that OPEC will extend production cuts. We said to look at the record U.S. inventories in a different light! Not as a glut that will feed the U.S. market, but more of a base to start to embrace the U.S. as a major oil exporter. We have made the leap and we choose to be energy independent and now the U.S. will soon be viewed as the new energy hub of the globe.
Triple A reported that, “oil prices slipped fractions of a penny over the weekend, reaching today’s national average price for regular unleaded gasoline of $2.31 per gallon. Today’s price is still two cents more than one week ago, four cents more compared to one month ago, and 50 cents more per gallon year-over-year. Retail prices continue to fluctuate but have remained between $2.28-2.32 for more than a month as reports of increased U.S. production continues to counter OPEC rebalancing efforts.”