Precarious Buoyancy: The oil sector at the mid-point of 2021 — Kay Rieck

2021 has, perhaps surprisingly, been positive for the oil sector so far. Prices are simmering away at two-year highs, and plenty of analysts are making positive noises about the sector. Some are even talking about USD100, per barrel by the end of the year. The challenges of the last eighteen months have led to a great deal of both consolidation and innovation in the sector, so it could be that it is in a strong position to enjoy the opportunities that the next eighteen months are likely to offer. It’s not all clear blue skies though, and optimism needs to be tempered with realism, suggests Kay Rieck, an experienced professional oil and gas investor.

The price of Brent Crude Oil futures hit a two-year-high last week, enjoying the heady heights of USD75 per barrel. Not to be left out, West Texas Intermediate climbed to over USD73 per barrel. Both figures are the highest that they have been since well before the arrival of the pandemic.

There are several factors behind the rise in the numbers, including higher than expected demand, particularly in the US where economic news has been consistently positive since the vaccine rollout has started to gain momentum. The easing of restrictions has led to an increase in demand for gas as Americans get back to moving around the country. Similar patterns are visible in some other parts of the world.

Inventories in the US are starting to feel the demand. According to sources reported by Reuters, crude stocks fell by 7.2 million barrels in the week ending June 18, well above the 3.9 million barrels that analysts had projected. This in turn is forcing prices up.

At the same time, the election of a relatively conservative president in Iran makes the prospect of an easing of economic sanctions against the country look remote at this stage. Iran is one of the largest countries in the Organization of the Petroleum Exporting Countries and its affiliate states, known collectively as OPEC+, meaning that the global supply of oil will continue to be constrained even if the organization agrees to expand capacity when the group next meets at the start of July.

At this point, an expansion of supply looks likely. The International Energy Agency is said to have asked oil producers around the world to increase production, and Russia, one of OPEC’s affiliate states, is said to be in the processes of preparing to table a motion to boost output at the meeting next month. Any decision that’s made won’t have an impact on production until the start of August, however.

The problem is that fundamentally, nothing has really changed at this point: yes demand in the US is healthy for the first time in some time, and several other economies are bouncing back to pre-COVID levels of activity and even productivity, but in many ways this is just a resumption of the status quo ante.

After the 18 months that the sector has had, the rise in the price of oil is something to be welcomed, but there are still many challenges ahead for the oil and gas sector. These need to be addressed, and they need to be addressed effectively if the sector is going to continue to attract not only investment but also fresh talent to work in the sector so that it can retain its position at the center of the world’s energy mix for as long as possible. It’s currently a buoyant market, but it may not last forever.

About the author

Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets, building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilizing his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Haynesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.