Capex cuts could lead to supply problems: Deloitte

US oil and gas producers' steep capital spending cuts could lead to a supply crunch after 2021, according to a report by consulting firm Deloitte.

Facing lower prices and weaker demand because of the Covid-19 pandemic, companies ranging from majors like ExxonMobil and Chevron to independents like Occidental and Marathon have all said they are significantly reducing their investments in new projects both in the US and overseas.

But that strategy, while understandable given the industry's current cash crunch, means that companies risk missing out on an recovery over the next few years, Deloitte said.

"We have an industry at risk of underinvestment," the report said. "In the medium-to-long term, underinvestment could affect supplies, especially from non-OPEC producing nations."

Deloitte said 33pc of oil and gas executives it recently surveyed expect a high risk of a new supply crunch over the next 5 years.

Producers have been cutting capex budgets so they can preserve cash flow and return money to shareholders through dividends. Chevron last week said it will spend $14bn-$16bn per year in capital projects from 2022 through 2025, compared its previous guidance of $19bn-$22bn. ExxonMobil expects its 2021 capital spending to range from $16bn-$19bn, 17pc-30pc lower than the $23bn target for 2020.

Overall, Deloitte estimates global capex spending this year will fall 23pc over 2019 levels.

But investors have so far have not been impressed with energy industry efforts. Since April, the S&P 500 index has gained 60pc while the S&P 500 energy index has trailed behind with a 35pc gain.

Moreover, Deloitte noted, the Brent price has so far failed to crack $50/bl despite the bull market.

This disconnect between price and stock performance is "disconcerting," the report said. "In fact, oil was the worst-performing commodity, falling behind even coal in 2020," Deloitte said. "The result: O&G companies remain short of confidence and capital to invest at this price range."

But the industry still needs to invest. To offset annual production declines of 6-7pc, producers need to invest about $525bn in capex each year, Deloitte said.

But the market is currently oversupplied: OECD country crude inventories are still at an all-time high of 2.96bn barrels and Opec+ nations have 7mn-8mn b/d of pledged output cuts to be rolled back. So reductions in capital spending will not really impact the supply/demand balance in 2021.

Some analysts are already predicting demand to recover next year, however, as governments start to distribute Covid-19 vaccines. Last week, investment bank Macquarie modestly upgraded its crude price forecasts for 2021, predicting gas and diesel consumption to reach at least 95pc of pre-Covid levels by next summer. And the bank expects jet fuel demand and international travel to fully recover in 2022.

By Thomas Lee