Are Oil Prices Headed toward $100 a Barrel?
On June 1, 2021, Jeremy Schwartz, Global Head of Research at WisdomTree and regular host of the Behind the Markets podcast, was joined by Mobeen Tahir, Associate Director of Research at WisdomTree, to host Erik Gilje, professor of finance at the University of Pennsylvanias Wharton School of Business. The topic was oil, and the focus was on Eriks bullish view on the commodity stemming from structural supply issues in the U.S. amid an improving demand outlook. Professor Gilje outlined that over the last decade, almost all new supply of oil has come from North Americai.e., either Canada or the U.S.while the Organization of the Petroleum Exporting Countries and its partners (OPEC+) have lost market share. The group was forced by the COVID-19 pandemic to reduce 9.7 million barrels of supply in what can be characterized as a dramatic and unprecedented policy coordination. But OPEC+ may not necessarily be fixated on quickly bringing this supply back online. This is because the group is possibly less worried about losing further market share to U.S. shale producers now than in the past. This marks a major shift in the dynamic between the two and could be the key force that drives oil markets higher. According to Professor Gilje, U.S. shale production is significantly impaired and this is driven by structural reasons. When West Texas Intermediate (WTI) oil was around $70 per barrel in 2018, there were 874 operating U.S. oil rigs. Today, there are 359. Similarly, the number of fracking crews in operation back then was 485 compared to 226 today. Investment in U.S. shale has fallen meaningfully, and U.S. oil production is likely to decline over the next 12 years, according to the professor. Professor Gilje cited a change in investor preferences and government stance as the two key factors. Investors who have not received dividends from U.S. shale producers in the last decade are now imposing a more stringent cost for their capital. They are not only demanding capital expenditure by the producers, but want them to have positive cash flow. Investors seeking carbon neutrality are also posing more challenging questions to oil producers, which further raises their cost of capital. The shift in government stance under President Biden is also noteworthy. Bidens freeze on rights of way for hydrocarbons across federal lands limits new pipeline capacity and increases breakeven costs for oil producers. So even though rig counts have risen slightly in recent weeks, pre-pandemic levels of output are unlikely to be restored given there can be 15%20% impairment when bringing rigs back online. This means that for production to remain flat, new wells need to be dugsomething which seems challenging given the higher cost of capital. As a result of this evolving dynamic, OPEC+ is unlikely to be rushed into bringing supply back online given the difficulties faced by U.S. producers. They are likely to let prices rise amid an improving demand outlook. Oil prices at $100 per barrel within the next 612 months might not be beyond the realm of possibility. Please listen to the full conversation below. Originally published by WisdomTree, 6/8/21  U.S. investors only: Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing. There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks. Past performance is not indicative of future results. 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