Analysts have warned that non-OPEC oil and gas supply is unlikely to renege on its 2020 losses in the short-term.
A reduction in capex and a “very thin” upstream project pipeline is going to limit the ability of operators to bounce back to pre-Covid-19 production levels, said Joel Hancock, oil specialist at French investment bank Natixis.
He added that, as things stand, OPEC “hold all the cards” as crude from affiliate members will lead supply growth this year.
Just five North Sea exploration wells were drilled in 2020, a record low figure, as economic uncertainty, brought on by the Covid-19 pandemic and sector downturn, caused operators to shelve plans.
Between March and April, the use of offshore drilling rigs globally underwent its largest monthly drop in 20 years, according to analysis from Rystad.
Speaking during a Natixis webinar yesterday, Mr Hancock predicted it’s likely to be OPEC members that step in and full supply gaps in the coming months.
He said: “In the short-term, one of our strongly held views is that conventional, non-OPEC supply is going to really struggle to make up some of the losses that we’ve seen in 2020.
“Extended periods of lower prices led to an incremental supply shutdown and we’re going to struggle to get back all of this volume. There are two aspects to this.
“The first one is that capex has been cut substantially. Of the 60 companies that have reported 2021 guidance so far, investments are down around 60% compared to pre-pandemic levels.
“The other element is that when we look at the upstream project pipeline for conventional oil, it’s very thin aside from a handful of high impact basins, including the Norwegian North Sea and Guyana. Outside of these regions, a very small amount of projects are coming online.
“Based on our modelling, the industry needs to deploy a fair amount of capex simply to stand still. To keep at the December 2020 exit rate, our expectations are that it will require around 400 rigs in the US upstream. At the moment there are around 290.”
He added that that any potential supply deficit in the future could be exacerbated by current “negative investor sentiment”.
Future growth in the sector is also likely to be reliant on higher commodity prices to incentivise capex, according to Natixis.
This combination puts OPEC on the front foot, following a consistent decline in market share since 2010, driven by an increase in US supply.
Oil has rallied in recent weeks, spurred on by brighter demand forecasts resulting from the discovery and rollout of Covid vaccines.
But, Mr Hancock said there are concerns that a rise in the price could encourage cartel members, specifically those that are economically damaged, to “cheat” on quotas.
Fundamental differences also exist between OPEC members, specifically Russia, which wants to follow a “market share strategy” with a “lower marginal price”, and Saudi Arabia, which is content to “market manage”.
This could lead to increasingly “contentious” meetings in the coming months.
Mr Hancock added: “With price levels around $60 a barrel, compared to $40 or $50, there’s going to be far more incentive for producers to cheat and to worry about rival suppliers filling the gap.”