Supply shortfall, demand strength to support oil: Hess

Oil markets are seeing a V-shaped rebound in demand but a U-shaped recovery in supply that will help set a price floor for crude of $60-70/bl in the short term, US independent Hess' chief operating officer Greg Hill said.

Global oil demand has recovered to around 98mn b/d and is likely to reach pre-Covid levels of 100mn b/d by the end of this year or potentially the first quarter of 2022, before rising to 101mn-102mn b/d next year, Hill said at Platts' Asia-Pacific Petroleum Conference (Appec) today.

But supply has been "a lot stickier", in part because of US shale producers' cash-flow discipline that has capped output. "So we are going to have adequate price support in the short term, probably at around $60-70/bl Brent, until supply and demand catch up and go into balance," he said.

Hill identified three "wild cards" that could upset the market, although the effects of the first two — the return of Iranian crude and the risk of inflation — are likely to be temporary, thanks to Opec supply management and the recovery of supply chains respectively, he said.

But the third major uncertainty, the effect of a slump in global upstream investment, is more serious.

"Pre-Covid, [annual investment] was $650bn, now it is closer to $300bn. And if you look at projections of overall demand growth six years ago, in spite of Covid, we are not far off," he said. "My biggest worry is that the industry is substantially underinvesting to meet future supply."

Lower investment, combined with capital discipline, is also holding down US shale production, where the pace of drill rig additions is just 50pc of what it was in the 2015-16 downturn, Hill said. That the majors now control a much bigger portion of US shale output is helping to restrict investment.

"The majors in particular are holding their capital discipline… Exxon had about 60 rigs going in 2020, now they have close to 10, and the messaging has been that they are going to maintain that level," he said, while Shell is selling out of the Permian basin completely. "I would be very surprised if the discipline did not continue in the shale space."

By Kevin Foster