THE mere talk of freezing output, or otherwise, continues to rattle crude oil markets. Sentiments seem ruling. Yet in the ultimate analysis, it's the fundamentals that would call the last hurrah. Markets could now be getting ready for the next phase – distinctly different from today. Pundits are beginning to insist, lack of investments is going to hit the sector – and hard – in the coming years. About $300 billion is needed to sustain the current level of production. Is that coming through? An oil shock may be lurking around the corner as the price bust has hammered investment in future supply, the Paris-based International Energy Agency is underlining. Market forces are "working their magic and higher-cost producers are cutting output," the IEA said in its monthly oil market report. "Historic" investment cuts taking place now increase the possibility of oil-security surprises in the "not-too-distant" future, Neil Atkinson, head of the IEA's Oil Industry and Markets Division, said in Singapore late March. About $300 billion is needed to sustain the current level of production, and nations including the US, Canada, Brazil, and Mexico are facing difficulty in keeping up investments, he said. "If investment doesn't resume in 2017 and 2018, we can see a spike in oil prices as oil supply can't meet demand." "You need to invest large sums of money just to maintain existing production and if you want to grow production to meet the demand growth that we're expecting, that money has to come from somewhere and we're seeing big cuts," Atkinson said in a separate interview at the event. Atkinson said supply and demand will move closer to balance in the second half of this year. And when the markets finally get balanced in 2017, there will be "barely any supply to meet demand" if investments don't resume in the next one or two years, Atkinson emphasized. Apart from Saudi Arabia and one or two other Gulf state nations, there is little spare capacity around the world, he said. Indeed over the last few years, investment in new drilling projects has plummeted. The crisis is particularly pronounced in the United States. To remain profitable, most US producers need oil prices to be above $50 per barrel. With prices continuing to stay lower, companies are finally beginning to make meaningful production cuts, with the IEA expecting producers to remove more than half a million bpd from the market this year. Last December, the monthly year-over-year change in production turned negative for the first time since September 2011. As per the IEA, the US output dropped further by 150,000 barrels a day between January and the end of February. Total output for the year could slide 7.4 percent, from 9.4 million bpd last year to 8.7 million bpd in 2016. Next year's output could decline further to 8.19 million barrels. The international scenario seems bleak too. Deloitte is of the view that as many as one-third of all global oil companies are at risk of bankruptcy this year, with the 175 most at-risk companies holding more than $150 billion in debt. The impact is getting evident. The International Energy Agency in March estimated that oil production among non-OPEC countries will fall by 750,000 barrels per day in 2016, up from its previous estimate of 600,000. The collapse in oil prices has caused a crunch in new investments, with an estimated $380 billion in planned oil projects being put on hold. Consequent to all this, the IEA believes the prices will more than double by 2020. IEA executive director Fatih Birol told a conference last February that oil prices could rise gradually to about $80 a barrel. "There was a rise, there will be a fall, and soon there will be a rise again." The IEA market outlook saw 4.1 million bpd being added to the global oil supply between 2015 and 2021, down sharply from 11 million barrels a day, added between 2009 and 2015 as, investment in future oil exploration and production was seen declining for a second straight year - the first back-to-back downturn in 30 years. The Norwegian consultancy firm Rystad Energy is now saying that the depletion of old oil wells is expected to surpass new sources of supply in 2016, as the ongoing oil price slump puts a long list of oil projects on the shelf. The firm hence is of the view that legacy production will tip the supply balance into the negative in 2016 for the first time in years. As per Rystad estimates, global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22 percent fall to $595 billion in 2015. Upstream investment so severely hit, that natural depletion rates were expected to overwhelm the paltry new sources of supply in 2016. Existing fields will lose about 3.3 million bpd in production this year, while new fields brought online will only add 3 bpd, Rystad underlined. This does not take into account rising oil demand, which will soak up most of the excess supply by the end of the year. But the 3 bpd of new supply in 2016 will mostly come from large offshore projects that were planned years ago, investments that were made before oil prices started crashing. And now the queue of new oil fields is beginning to thin out. By 2017, the supply/depletion balance will go deeper into negative territory. Depletion will exceed new sources of production by around 1.2 m bpd before widening even further in 2018 and 2019. Wood Mackenzie in a report published in January said projects worth $380 had been put on ice due to the crash in oil prices. This meant that twenty-two major projects and seven billion boe of commercial reserves were delayed over the last six months. The report added that between 2007 and 2013, the oil industry green lighted about 40 large oil projects on average each year. That figure plunged to fewer than 10 in 2015. And this estimation was in addition to the existing 46 developments and 20 billion barrels of oil equivalent (boe) reserves that were deferred and identified in a June 2015 report. The report emphasized "our tally now sits at 68 major projects containing 27 billion boe. This equates to $380 billion of capex deferred by total project spend in real terms. By 2021 volumes at risk could be 1.5 million bpd, rising sharply to 2.9 million bpd by 2025." Market fundamentals and not just sentiments, could undergo a change in medium term. For major stakeholders, light at the end of the tunnel could be sensed - finally.
