Oil came off the boil again this week as a tropical storm veered away from oil- and gas-producing areas in the Gulf of Mexico, sending New York futures down to below $70 a barrel. However, prices have still risen by 18% this year and have more than doubled since late 2002, and the supply/demand outlook remains bullish.
In the short-term, slim spare global production capacity means that any potential supply disruption can prompt a surge. And with hurricane season now here, constant tension in the Middle East and militant attacks on pipelines in Nigeria, there are plenty of those around.
As for the longer term, demand will reach 86 million barrels per day this year, or 1,000 barrels a second, as John Mauldin points out on InvestorsInsight.com, and could hit 100 million barrels by 2016.
Yet finding new supplies to match this growth – while replacing the oil in older fields – looks a stretch. There have been no major discoveries for 30 years, while many non-Opec countries have already passed their production peaks.
What’s more, Saudi Arabia, which “sells itself as the swing producer”, is unlikely to come to the rescue, according to Curtis Hesler on Forbes.com. It seems Saudi wells are producing a higher ratio of water now, “a sure sign” that production has peaked. Given all this, it’s no wonder many expect global production to peak in the next few years.
But analysts and investors have been slow to cotton on to the bullish outlook. As Simon Rubinsohn of Barclays Wealth notes in The Business, investors are discounting a future oil price “significantly below” current levels: the global oil sector is on a forward p/e of just over ten, compared to the overall market’s 13.5.
What’s more, the industry’s dividend yield exceeds the market’s and payouts are likely to grow at double-digit rates this year. With oil set to stay high over the next few years, the sector remains “very attractive”. The crowd has yet to wake up and join the party.