iFund- The Revival of American Energy Industry

2019-04-17 03:25
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The decline in oil production costs has changed the ecosystem of the global energy industry. The economic cycle may affect energy demand, but long-term energy demand will continue to grow. On the one hand, the growth of tourism in Asia has driven up the demand for local aviation fuel. On the other hand, strong consumer demand in Asia is also driving demand for petrochemical products.

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The rise in US energy output has become an important factor in oil prices in the past five years. The revitalization of the US energy industry has attracted more funds to invest in local petrochemicals and related industrial enterprises. The International Energy Agency’s IEA released its energy outlook for the next five years on March 11. The United States will become an important part of energy supply. The impact will be long-lasting and omnidirectional.

US energy supply will surpass Russia

Thanks to the rapid development of shale oil, the United States has changed the pattern of global energy supply and demand. According to the IEA report, the United States will catch up with Russia by 2024 and be close to Saudi Arabia, the world’s largest exporter. At the same time, the IEA expects that for every six barrels of global energy supply, four barrels will come from the United States.

Outside the US, the energy supply of the Organization of the Petroleum Exporting Countries OPEC will decline because many OECD countries are facing sanctions from different countries, especially Iran and Venezuela. However, the outlook remains unclear. Libya may gradually resume the supply of crude oil. Geopolitics risks is a source of short-term fluctuation in energy supply.

Prudent investment is more profit-oriented

Compared with energy investments before 2014, current US energy investments are more focused on return on investment. The sharp drop in oil prices from 2014 to 2016 has caused shale oil producers to survive the fittest. Only companies that are financially sound and high-quality control can survive.

Prudent investment does not mean a decline in the growth rate of oil production. First, shale oil production efficiency continues to increase. Second, the decline in the number of new mines is only a reflection of the lag indicator in the falling oil prices in 2018. Year-to-date, oil prices have risen by more than 10%, helping companies to restart investment. Finally, according to the IEA report, there are a large number of inactive mines in the United States. If oil prices and demand recover, US oil companies can quickly adjust production to meet new demand. Therefore, short-term oil price fluctuations will not affect the long-term investment plans of oil producers.

In the long run, oil prices are closely related to the prospects of industrial enterprises. According to the IEA report, US shale oil growth will reach approximately 50% in the long-term price hub of crude oil at a benchmark of $60 per barrel. If the oil price centre falls to a pessimistic situation of $40 per barrel, US shale oil will not be economically efficiency.

In summary, the decline in oil production costs has changed the ecosystem of the global energy industry. The economic cycle may affect energy demand, but long-term energy demand will continue to grow. On the one hand, the growth of tourism in Asia has driven up the demand for local aviation fuel. On the other hand, strong consumer demand in Asia is also driving demand for petrochemical products.

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