It wasn't all that long ago when fears started growing that the world was about to hit a peak in oil supply, which would lead to a devastating spike in prices. However, the shale boom seems to have quashed those fears for the time being, after U.S. producers unleashed a gusher of new supplies. Output rose so fast that oil piled up in storage, causing crude prices to crash in recent years.
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Now a new peak fear has started taking root in the market, which is that demand could hit its pinnacle as early as the next decade because of the rise in electric cars. While that's certainly possible, it's not a near-term concern for oil producers, since global oil demand is red-hot right now. Further, OPEC and others don't expect a peak anytime soon. In fact, the oil-producing group sees demand topping 100 million barrels per day by 2020.
Marching toward 100
OPEC Secretary-General Mohammad Barkindo recently spoke at an industry conference, at which he gave a decidedly bullish message on the future of the oil industry:
I have gauged the industry's temperature. There is no doubt that we are starting to feel a warmer glow. There is now more talk of a brighter outlook. It is a feeling that has been missing from the industry for far too long. This positivity is underscored by recent data.
One of those data points is oil demand, which has accelerated this year. According to the International Energy Agency (IEA), global oil demand grew by a remarkably healthy 2.2 million barrels per day (BPD) in the second quarter, putting it on pace to rise 1.6 million bpd this year, or 1.6% higher than last year. Meanwhile, the IEA sees demand increasing by another 1.4% next year.
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Because demand growth remains strong, Barkindo said that OPEC expects it to "pass 100 million barrels a day in 2020 and to reach over 111 million barrels a day by 2040." In other words, "there is no peak oil demand for the foreseeable future," according to Barkindo. That lines up with the view of the U.S. Energy Information Administration (EIA) as well as the IEA, both of which don't expect global oil demand to stop growing until at least 2040. Further, the EIA anticipates that fossil fuels will still account for 77% of energy use that year, though it does expect oil's market share to fall from 33% in 2015 to 31%.
Minding the gap
These forecasts imply that oil producers will need to continue expanding output. Last month, oil companies pumped 97.5 million BPD, roughly matching demand. However, with consumption expected to increase next year, and in those that follow, producers need to keep up. Those best positioned to meet this challenge will be the ones with the lowest costs, which includes many OPEC nations as well as top-tier shale drillers.
One of those positioned to thrive in a world where oil demand continues rising is U.S. shale giant EOG Resources (NYSE: EOG). The company spent the better part of the downturn driving out costs and focusing its attention on identifying its best drilling prospects. EOG Resources set a return hurdle of 30% at $40 oil for these premium locations and had identified 3,200 of them by early last year. However, thanks to continued innovation and a smart acquisition, EOG now has 7,200 sites, which is enough to last it more than a decade at its current drilling pace. It's not a slow one either, at $50 oil, the company would produce enough cash flow to pay its dividend and fund the investment needed to increase oil production at a 15% compound annual growth rate through at least 2020. Meanwhile, it has the potential to accelerate that pace up to 25% if crude averages $60 a barrel.
Another oil growth leader that can help meet future demand is Marathon Oil (NYSE: MRO). Like EOG, Marathon spent the downturn driving out costs and cultivating an inventory of high-return drilling locations by selling high-cost assets and reinvesting the proceeds into low-cost shale plays. As a result, Marathon is in position to increase its production by a 10% to 12% compound annual growth rate through 2021. Further, it can achieve that growth rate, and pay its dividend, while living within cash flow as long as crude remains in the low $50s.
Other drillers can grow at equally impressive rates, though they need oil in the mid-$50s to do so. For example, Pioneer Natural Resources (NYSE: PXD) can increase its oil equivalent output by a 15% compound annual rate all the way through 2026 as long as crude is around $55 a barrel. At that pace, Pioneer would grow from its current rate of 276,000 barrels of oil equivalent per day (BOE/d) up to 1 million BOE/d by 2026. Meanwhile, Devon Energy (NYSE: DVN) sees its U.S. oil output rising 18% to 23% by the end of this year, and another 20% next year, though it needs crude in the mid- to upper $50s to do so within cash flow. Devon has a vast resource base to keep growing in future years, boasting a multi-decade inventory of high-return drilling locations in the United States.
Still plenty left in the tank
At some point, the world will hopefully end its addiction to oil and transition to cleaner energy sources. But with insatiable demand still around, this peak appears to be a long way off. As a result, oil companies with low-cost resources should thrive in the coming years as oil consumption tops 100 million barrels per day, which suggests that investors could see a gusher of profits, especially if oil prices move up with demand.
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