Headlines
• Oil Price: While like all people in the oil business we’re concerned about the current oil price, but we are less concerned about the oversupply in the marketplace beyond 12 to 18 months, simply because the contraction in investment will see the natural decline rate associated with production start to impact the overall supply levels. It is important to remember that this is distinctly different from nameplate capacity, and is set at the front end engineering and design stage.
• Bowleven (LON:BLVN) – Promising Progress: Still, we believe that investors will continue to be pleased with management and while there may well be a hiatus between the completion of the texting programme and the delivery of revenues, given what's happening in the remainder of its portfolio, we believe that this is less important than it otherwise would have been.
Oil Price
The perceived "supply overcapacity" there has been in the market, ultimately the natural decline curve, coupled with the shelving of investment in new production, will see that situation reversed quickly. This of course ignores any geopolitical tensions that there may well be on the supply side, especially in the Middle East where an all-out war between Saudi Arabia and Iran will result in one winner – and it won't be Iran.
There are so many variables that impact the oil price, but our contention is that the supply side isn't as robust as people believe it is, and this is only exacerbated the further out you look. Arguably, there is a scenario that isn’t too farfetched that says that within two years the market is going to be worried about bringing on the projects that were shelved in this price environment because there is a perceived shortfall.
This is assuming that demand remains at current levels. What is a real unknown, especially at the moment, is the demand side of the equation. Again, here too the fact that will demand is an inelastic driver (as it used in so many things from household plastics through to transport fuels) the real question is going to be to what extent global growth accelerates from these levels. Changes in demand tend to vary between -5% and +5%, with the extremes of decline only precipitating from catastrophic contraction in GDP.
If we balance this against the fact that supply will naturally decline at between 8 to 10% if no investment is made, then on balance the further out we look, assuming we hold the current investment cycle steady, the worse we believe the supply imbalance will become. Whilst we cannot rule out further downward legs in the oil price, we do believe that the current oil price environment will be seen as the downward leg of what generally will be an upward progression.
While like all people in the oil business we’re concerned about the current oil price, but we are less concerned about the oversupply in the marketplace beyond 12 to 18 months, simply because the contraction in investment will see the natural decline rate associated with existing production start to impact the overall supply levels. It is important to remember that this is distinctly different from nameplate capacity, and is set at the front end engineering and design stage.
News Items
Bowleven (LON:BLVN) – Promising Progress
Today's news serves to provide further support to the commercial viability of the Moambe and Zingana discoveries. For us the real question now isn't one of whether the discoveries will produce sufficiently quickly, but whether that rate is commercial given the cost of development, off take volumes and price.
Still, we believe that investors will continue to be pleased with management and while there may well be a hiatus between the completion of the texting programme and the delivery of revenues, given what's happening in the remainder of its portfolio, we believe that this is less important than it otherwise would have been.
We may provide a further update on one, or all, of the stories above later today. However, if there is anything that you would like to discuss, please feel free to contact us.