Oil & Petroleum

After several years of oversupply, the oil and gas industry could very well be moving headlong into a supply crunch. This may seem hard to imagine, given the ramping up of U.S. oil production and the burgeoning sense of optimism that is sweeping the sector. In general, the industry feels much healthier than it did 12 months ago: The price of oil has rebounded. After appearing limited to a range between the mid-$40s and $50 per barrel (bbl), Brent crude is now trading above $70 (at the time of writing). The industry is thus recovering from the brutal last few years of weak prices, enforced capital discipline, portfolio realignments, and productivity efficiencies.

At the same time, the International Energy Agency (IEA) has been flagging the possibility of a supply crunch since 2016. More recently, the CEOs of Total, Eni, and Saudi Aramco have warned of one by the end of the decade. With oil demand growing, and investment in many major projects having been deferred during the downturn, there is less potential supply available. Oil companies will need to boost their production, and there is a risk that some may struggle to keep up.

The fundamental challenge, of course, is the intrinsic volatility in the sector. Producers need time to address the vagaries of an over- or under-supplied market. They also need to grapple with the pace and magnitude of the transition to energy from non-fossil fuel sources. Facing these uncertainties, oil and gas companies must develop a resilient strategy to mitigate these risks.

In short, while the supply glut may have ended, its aftereffects will continue. In the short term, companies must maintain capital discipline and the focus on productivity improvements and applying new technology. In the long term, they need to make their portfolios profitable against low break-even prices. Moreover, they’ll need to figure out how to future-proof their overall portfolio, and make it secure amid the transition to a lower carbon world.