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Oil prices have risen sharply in recent months. Normally, this is a recipe for a drilling frenzy on the part of American oil producers. But something strange is happening, or rather not happening.
“US producers are actually limited right now,” says Helima Croft, global head of commodities strategy at RBC Capital Markets. “They are trying to be disciplined.”
Oil companies are under great pressure to keep production low. And the call comes from inside the house: it’s oil investors that push companies to pump less oil.
To understand why, it helps to take a little trip back in time.
Over the past decade, the hydraulic fracturing revolution has caused US oil production to skyrocket. Star-eyed investors poured huge sums of money into the oilfield. Even after the oil price crash in 2014, they bailed out companies on the brink of bankruptcy and waited for all of their investments to pay off.
Instead, “the people who came in and put money to work … were burned,” says Dan Pickering, chief investment officer of Pickering Energy Partners.
It’s a simple principle of supply and demand: the more oil there is to sell, the less each barrel is worth. This is why members of the OPEC oil cartel negotiate among themselves to keep global supply low, limit volatility, increase prices and improve producer results.
But America’s oil producers don’t coordinate like that. They turned all that Wall Street money into as much oil as they could pump – by overloading the market and keeping prices low. When they made the money, they reinvested it in more drilling, instead of viewing it as a profit.
This has left many companies overexploited, in debt and in trouble – and it was before the pandemic has caused an acute crisis for the entire oil industry.
How bad has it been for investors? Manas Satapathy, managing director of consultancy firm Accenture Strategy, talks about exchange-traded funds like PSCE and FRAK, which track the performance of many US oil producers.
If you had invested a dollar in 2016, you would have lost about 60% of your investment at the start of 2021. If you had invested the same dollar in the S&P 500, you would have doubled your money.
Of course not everybody lost money in the oil boom. Investors who timed well saw returns, oil executives got big paychecks, and oil workers and the companies that serve them have had great years.
But many of the big banks, pension funds and other investors who financed the oil boom saw nothing close to the returns they expected.
“A lot of investors left with a bad taste in their mouths and won’t be coming back anytime soon,” says Satapathy.
Steven Senne / AP
This exodus is not just about recent returns. Climate change and the long-term outlook for oil are also of growing concern.
New York City Comptroller Scott Stringer works with a board of directors to manage one of America’s largest public pension funds.
The city recently withdrew $ 4 billion from those pension funds from fossil fuel investments, both in the name of fighting climate change. and protect the fund’s financial results.
“The data doesn’t lie,” says Stringer. “These are not investments that will grow a pension fund.”
Governments, including the Biden administration, are pushing for a faster transition away from fossil fuels. This global action on climate change raises huge questions about the long-term prospects of the oil and gas sector as an investment.
So what is it today?
The energy sector is booming right now, as oil prices soar amid signs of a global economic recovery.
But even investors who stick to oil and gas are putting a lot of pressure on companies to hold back.
And that makes a big difference. Many oil producers need Wall Street money to fund new wells. Investors control the purse strings. And right now, investors just aren’t impressed with how many barrels a company says it can drill.
“Investors don’t want to invest for growth,” says Pickering of Pickering Energy Partners. “Growth has given us more barrels. It has given us too many barrels. It has given us low prices. It has given us low returns.”
Less oil, more liquidity: this is what the oil financiers are asking for. And in response, executives swear they will be responsible and focus on profits rather than oil.
In this spring’s earnings calls, CEOs who once bragged about how much oil they could pump are now on the defensive with every new drilling rig they deploy.
This change has not gone unnoticed by analysts, investors or rivals.
“Exercise, baby, exercise” is gone forever, “Saudi Energy Minister Abdulaziz bin Salman said Thursday with a smile. OPEC + keeps supply under control, and Ben Salman said shareholders’ interests will push US producers in the same direction.
But will it really be forever?
Oil companies love to drill for oil. That’s kind of what they do. And as prices rise, they may struggle to meet the austere targets they’ve committed to.
This remains a concern for oil investors who remain, according to Rebecca Fitz of the Center for Energy Impact at the Boston Consulting Group.
“The fear is that companies will start to invest all of their money in growth,” she says. “His the question to watch for next year. ”