Oil hits pandemic high as investors bank on green energy

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Some investors are betting that Wall Street’s preference for green energy will depress spending on oil extraction, paving the way for supply shortages and rising fuel prices.

The bets come as fund managers line up trillions of dollars for wind, solar and other renewable energy programs and spending on oil projects plummets. The fall in spending on fossil fuels is becoming so severe that energy companies could struggle to quench the world’s thirst for oil, some analysts say.

Crude is expected to remain in high demand over the next decade to make transportation fuels and petrochemicals used for plastics and other household products. U.S. consumption has increased in recent times following the worst of the coronavirus pandemic, and production cuts by the Organization of the Petroleum Exporting Countries have given prices a new boost.

U.S. crude hit $ 71.48 a barrel on Monday, its highest level in over 2.5 years, and has roughly doubled since late October. Some traders use options, which allow the holder to buy or sell an asset at a specific price in the future, to bet on prices reaching $ 100 by the end of next year.

Even after OPEC and its allies increased production in the coming months, some analysts believe that production will struggle to catch up with demand, which the International Energy Agency plans to increase at least until 2026. Spending on oil extraction fell to about $ 330 billion last year, less than half of the total from its 2014 record, according to research firm Wood Mackenzie . This figure is expected to increase slightly this year and in the years to come.

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Leigh Goehring, managing partner of commodity-focused investment firm Goehring & Rozencwajg Associates, said he believes prices will skyrocket in the years to come as consumption exceeds production capacity for a extended period for the very first time. His company lifted its investments in power producers during last year’s crash and has maintained those holdings.

“This is the basis of the next oil crisis,” he said. “We are in uncharted territory.

Analysts say a spike in oil prices could turn out like this: As more people resume travel after the pandemic, demand is expected to increase. This would allow OPEC to ease supply restrictions and reduce global inventories of crude. If consumption continues to rise beyond 2022, as many expect, then the world would need more oil from the same companies currently being urged by investors to limit spending, leading to a supply shortage.

OPEC has the capacity to rapidly increase production, and there are currently large reserves that could be tapped to respond to price spikes. But many on Wall Street are pulling out of the fossil fuel industry, leaving investors wondering if companies would be able to raise enough money to fill long-term supply gaps.

In recent years, growing output from U.S. shale producers and giant oil companies has pushed prices down. Today, many analysts doubt that these companies are rapidly increasing their spending in the face of industry consolidation and growing environmental pressure. Energy companies recently reduced the value of their assets by tens of billions of dollars as the industry grapples with last year’s wave of bankruptcies and project setbacks.

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According to JPMorgan Chase & Co. analyst Christyan Malek, planned investments in global oil supply are about $ 600 billion less than what will be needed to meet expected demand by now 2030. The pressure to provide liquidity to shareholders, driven in part by concerns about the long-term outlook for oil demand, has limited the industry’s ability to invest money in new projects, a- he declared.

“It’s just hard to see where the capital will come from to grow at a rate that will be needed from 2022,” said David Meaney, founding director of Assert Capital Management LP. The Dallas-based hedge fund is positioning itself for higher oil prices through futures and options.

The bets remind us that the unprecedented transition to renewable energies and electric vehicles is still in its infancy and could go through several phases. It also shows the challenges faced by producers like Exxon Mobil Corp.
, Chevron Corp.
and Royal Dutch Shell PLC.
In addition to concerns about expenses and shareholder returns, they face mandates to limit environmental damage. Shell said last week it would speed up efforts to cut emissions following a Dutch court ruling ordering the company to take more drastic action.

As the economy recovers from the pandemic, the question facing the energy industry is whether demand will eventually drop to match limited supplies, investors say. This reverses a decades-old paradigm of whether production can catch up with consumption, with Wall Street debating uncertain estimates on the speed of the transition to renewables.

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“I am optimistic about electric vehicles. It still takes a while before they can pull off a significant portion of the demand for oil, ”said Jason Bordoff, former energy adviser to the Obama administration and founding director of the Center on Global Energy Policy at Columbia University.

Another obstacle for producers: the drop in production from existing wells over time. The number of oil rigs in the United States remains about 60% below levels at the end of 2018, even as prices have risen, according to figures from Baker Hughes.

“Investors have made it clear to the energy sector, ‘Don’t spend a lot of money,’ said Rob Thummel, senior portfolio manager at Tortoise, energy asset manager. “Boards of directors and management teams must listen to shareholders. “

The energy industry is not alone in taking a cautious approach. Miners, who spent money the last time industrial metal prices soared, have also been reluctant to invest money in projects as investors encouraged greater discipline.

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Some analysts argue that concerns about an oil shortage are overblown, especially when large suppliers are still intentionally withholding large quantities due to disruption caused by coronaviruses. Producers and investors could be less disciplined to limit capital spending and supply if prices soar and they could profit from it, they say.

But for now, many are positioning themselves for shortages. Hayal Ahmadzada, commercial director of the commercial branch of the Azerbaijani state oil company, drives a Tesla Inc.
electric car, but expects crude to exceed $ 100 a barrel next year.

“The transition has to be very careful to avoid big disruptions,” he said.

Write to Amrith Ramkumar at [email protected] and Joe Wallace at [email protected]



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