Oil market downturn presages dramatic price hike

ANOTHER oil price downturn threatens to deepen the plunging levels of investment in upstream oil and gas production, which could create a more acute price spike in the years ahead.

Oil and gas companies have gutted their capex budgets - necessary moves as drillers went deep into the red following the crash in oil prices. But the sharp cutback in investment means that huge volumes of oil that would have otherwise come online in five or ten years now will remain on the sidelines.

The industry will cut spending by US$1 trillion through 2020, according to Wood Mackenzie. Those reductions are creating a "ticking time bomb" for oil supply. The consultancy projects that the market will see 5 million barrels of oil equivalent per day (mboe/d) less this year, compared to expectations before the collapse of oil prices. And next year, the industry will produce 6 mboe/d less than it otherwise would have had the spending cuts not been made. This is creating the conditions for a supply crunch and a price spike.