Volatile Prices for Oil/Gas Will be Part of Energy Transition

November 25, 2020

Oil has been on a downtrend.
Exxon projects prices will be lower than thought in the coming decade.

Gas also in a bind. Frackers continue to lose money with low prices – but if price goes up, cheap renewables continue to eat their lunch.

One wild card is will Russians and Saudis continue to pump enough to keep prices low, as they have for the last year. Welcome any intel on that.

Wall Street Journal:

Exxon Mobil Corp. has lowered its outlook on oil prices for much of the next decade, according to internal company documents reviewed by The Wall Street Journal.

As part of an internal financial-planning process conducted this fall, Exxon cut its expectations for future oil prices for each of the next seven years by 11% to 17%, according to the documents.

The sizable reduction suggests the Texas oil giant expects the fallout from the coronavirus pandemic to linger for much of the next decade. The fossil-fuel industry is also contending with increased competition from renewable-energy sources and electric vehicles, as well as the prospect of increased climate-change regulation around the world.

Unlike some rivals, Exxon doesn’t publish its internal views on commodity prices, which it views as proprietary. Some investors have pressured Exxon to release them, arguing that the forecasts are critical to understanding a company’s plans and the future value of its assets.

In 2019, Exxon had internally forecast that Brent oil prices, the global benchmark, would average around $62 a barrel for the next five years before increasing to $72 a barrel in 2026 and 2027, the documents state.

This summer, the company lowered that forecast to between $50 and $55 a barrel for the next five years, before eventually topping out at $60 a barrel in 2026 and 2027, according to the documents, which were dated September.

Brent oil is currently trading for about $47 a barrel after a jump in prices this week that has brought prices back to their highest levels since spring.

Exxon’s new price forecast was used at an early stage of modeling its financial plan, which the company’s board was set to vote on this month, according to an Exxon executive. An Exxon spokesman declined to say what its current price projections are, saying that the company uses a range of prices to develop its business plans.

Years of lower oil prices threaten to put further financial pressure on Exxon, which has posted three straight quarterly losses this year for the first time on record, and before the pandemic was in the midst of a plan to spend $230 billion to pump an additional one million barrels of oil and natural gas a day by 2025.

While Exxon doesn’t disclose its forecasts, it has sounded upbeat in public statements about the long-term future for the oil industry coming out of the pandemic.

The company told investors in October that current underinvestment in oil and gas production would leave the world short of needed fossil fuels in coming years. In a note published on Exxon’s website in October, Chief Executive Darren Woods called the industry’s woes temporary and said that the need for Exxon’s products would increase in the near future.

“Even accounting for the short-term demand impact of Covid-19, the investment case is still clear,” Mr. Woods wrote.

Tim Lattimer on Twitter:

The energy transition means that at some point in the near future peak demand for oil will pass and begin declining every year. But supply and demand balance will still matter in that world, and it will be just as likely that we get it wrong then as we do now.

As a result, we will see price spikes and crashes. For example, right now, investment in new oil and gas is really low, less than half what it was earlier this decade. That could very well lead to an undersupplied market in the 2020s with an associated price spike.

And that will lead to a ton of HOT TAKES, especially if industry profits roar upward with a price increase. But that will not mean that the transition is wrong. It will likely accelerate it, because new solutions are going to change the elasticity of demand for oil dramatically.

A difference between price shocks of the past and those of the future is that viable alternatives finally exist to many oil products. The biggest beneficiary of an oil price spike in the short term will be oil companies, but longer term it will just accelerate EV adoption.

So don’t fall into the trap of overreacting to price movements one way or the other. The transition will likely lead to even more price volatility, with booms and busts and all the associated profits and heartache. But it will be different now because there are alternatives


3 Responses to “Volatile Prices for Oil/Gas Will be Part of Energy Transition”

  1. doldrom Says:

    Very hard to predict. Higher prices would lead to investment in both renewables as well fossiel fuels, but those investments take years to realize, and many projects have a lot of other concerns/risks than just the price of capital and anticipated price points.
    On the other hand, demand has become less predictable, and supply is also unpredictable because a large part of oil production is cheap, but the producers are continually balancing domestic jobs/industry, market share, and price. Their interests in general are higher prices for less production. A lot of variables interacting.

  2. redskylite Says:

    Unfortunately , meanwhile Russia plows ahead in their new found Arctic El Dorado, oblivious to Climate Change.

    “Between now and 2024 he said that 30 million tonnes would be sent from the Arctic along the so-called Northern Sea route connecting the Atlantic Ocean to the Pacific.”


  3. jimbills Says:

    Here’s the latest in ‘what completely awful thing can Trump do in his last two months?’:

    Trump Admin Ignored Internal Concerns When Clipping Bird Protections, Documents Show

    So much for his ‘windmills are killing all the birds’.

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