Looks like US shales have been high-graded, page-17

Academic claptrap that merely over-complicates something that is very simple:

1. Future Demand is largely a known (as we've established)

2. Future Supply involves aggregating the stated actions of a few large supply blocs (OPEC+, USA. OECD, Non-OPEC OECD).

You don't need to be 100% accurate; achieving mere directional accuracy will tell you what the prospective Supply-Demand balance looks like.

To wit, my entire thesis for investing in oil stocks is encapsulated in the following few short paragraphs:

From post entitled "Supply Side Shock in the Making" (6 Aug 2021)
(https://hotcopper.com.au/posts/55091411/single):

"However, every once in a blue moon - maybe every 10 or 15 years - some unique set of circumstances can be identified which offer the opportunity to be able to make a reasonable prediction of commodity prices (if not accurately, then certainly directionally).

In the case of the global oil industry, we are seeing - according to my assessment of it - a supply-side shock of sorts in the making.

This supply side shock is, in great part, due to the "ESG" influences in the boardrooms of the major oil companies which are headquartered, and have their shareholder bases, in the developed world.

We know that the geophysical nature of oil fields is that they experience a natural decline from the very first day they commence production. So - forgetting about increasing supply - just to stand still requires continuous investment to be made.

According to WoodMackenzie, one of the world's pre-eminent oil & gas consultancies, to maintain global oil output at the current 91 m bpd, around US$600bn pa needs to be spent on oil exploration and development globally. For the past few years, the world has been running at roughly US$300bn, so half of the rate required to maintain output.

The International Energy Agency, in its March 2021 report, "Oil 2021 - Analysis and Forecast to 2026" forecast that non-OPEC supply will increase by 7%, from 63.1m bpd to 67.6m bpd, over the next 5 years. However, given the current rate of under-investment in supply, globally, there must be a measure of downside risk to that expectation of a 7% ex-OPEC supply increase.

But even assuming the non-OPEC supply does manage to increase by 7% between 2020 and 2026, by comparison global oil demand will increase by 14% (by 9% in OECD countries and 19% in Non-OECD countries), from 91m bpd to 104 bpd.

So the ex-OPEC deficit will rise by a very significant 31%, from 27.9m bpd to 36.5 m bpd.

That's a big gap for on which the world would need to depend on OPEC to fill.

And remember, that's based on assumptions of expected ex-OPEC supply increase which are not being supported by the level of capital investment inputs that are required for such an increase.

If non-OPEC output stalls at roughly the current level, which is not at all implausible given the increasing momentum to cease investing in dirty fossil fuels, then the OPEC deficit gap would grow each year to reach 41 mbpd in 5 years' time, from 28mbbl today.

So to keep the market balanced, OPEC output will need to be 13mbpd greater (a~45% increase) in 5 years' time than it is today.

There is zero precedent for that happening in the word of OPEC."



Sounds so deceptively simple (with the benefit of hindsight, of course!)
Oh, if only they were all that simple!

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