Oil Could Stand To Recover Big Time – But Be Careful | Summary and Q&A

TL;DR

Bloomberg suggests that when the oil market rebounds, it could rebound significantly due to under-investment in the industry and declining production levels.

Key Insights

• 🛢️ Current oil prices are not encouraging investment in the oil and gas industry, leading to under-investment and declines in production levels.
• 🥳 The natural decline rate of oil reservoirs requires the finding and replacement of 5-7 million barrels per day.
• ⛓️ Under-investment across the value chain could result in several years of production declines.
• 🛢️ Once the overhang of oil clears and production declines become apparent, supply shortages may lead to a rebound in oil prices.
• 🛢️ Markets tend to overshoot, and speculators could buy future contracts to increase oil supply and meet demand shortages.
• 🧑‍🏭 Future oil price projections are often inaccurate due to the multitude of factors influencing daily prices.
• 🛢️ The forward curve of oil is highly volatile and subject to frequent changes.

Transcript

Sean O’Reilly: We've been saying a while how, we're Fools, we're not macro-people, we don't make macro calls, but we know economics, and we know that current oil prices are not incentivizing anybody to find more oil, which relates to our first story today. But, something's going to have to happen to change the current status quo. Recently, Bloomber... Read More

Questions & Answers

Q: Why is there under-investment in the oil and gas industry?

The under-investment is due to a lack of economic incentives caused by current oil prices, discouraging companies from finding new oil reserves.

Q: What would happen if production declines due to under-investment?

Production declines would lead to a shortage of supply, which would cause prices to increase and potentially result in a rebound in the oil market.

Q: Will the market overshoot when supply becomes short?

It is possible that speculators in the New York Mercantile Exchange could overshoot the market by buying future contracts in order to increase oil supply.

Q: Why are oil price projections often inaccurate?

Daily oil prices are influenced by numerous factors, making it difficult to accurately predict future prices. The forward curve of oil is frequently subjected to significant changes.

Summary & Key Takeaways

• Bloomberg's article highlights that there is a massive under-investment in the oil and gas industry, leading to a decline in production levels.

• The natural decline rate of oil reservoirs is around 9%, and finding and replacing around 5-7 million barrels per day is necessary to maintain production levels.

• The current under-investment in the industry could lead to future production declines, resulting in a potential rebound when the oil market stabilizes.