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Bernstein: Oil May Jump Past $150 On Chronic Underinvestment

Bernstein: Oil May Jump Past $150 On Chronic Underinvestment thumbnail

A supply shortfall is lurking should major oil companies continue to underinvest in exploring for new oil reserves, and this “chronic underinvestment” is setting the stage for the next super-cycle that could see oil prices soar to $150 a barrel or more, analysts at Sanford C. Bernstein & Co said on Friday.

Investors clamoring for cash returns on their investments in lieu of increased capital expenditures may soon backfire, as new oil reserves may be unable to keep up with demand, according to Bernstein analysts.

“Investors who had egged on management teams to reign in capex and return cash will lament the underinvestment in the industry,” the analysts said in a note, as carried by Bloomberg.

“Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008.”

“If oil demand continues to grow to 2030 and beyond, the strategy of returning cash to shareholders and underinvesting in reserves will only turn out to sow the seeds of the next super-cycle,” said Bernstein.

“Companies which have barrels in the ground to produce, or the services to extract them, will be the ones to own and those who do not will be left behind.”

After the oil price crash of 2014, oil companies slashed exploration capital expenditure. Now that oil prices have recovered, those companies are looking to reward shareholders with dividends and share buybacks to show that they have successfully come out of the price slump.

The lowered capex in exploration, however, is depleting the oil industry’s reserves and reserves replacement ratios. According to Bernstein, the reinvestment ratio in the industry is the lowest in a generation, which is setting the stage for a super-spike in oil prices; prices may even beat the record of $147 a barrel from 2008.

*  *  *

ZH: It’s not just Bernstein that is fearsome of this kind of squeeze. BofA’s Global Commodity Research team see a $50/bbl premium (i.e.around a $120 price for WTI) in the shorter-term if Iran is fully cut off.

Trump may consider reducing Iran oil exports to zero…

President Trump announced back in May that the US would unilaterally pull out of the Iran nuclear deal and re-impose sanctions on Iranian oil exports. Yet, Iran represents about 5% of global oil supplies. Can the US Department of State avoid issuing waivers to some Iran oil importers? In our projections, we have just factored in a 0.5mn b/d reduction in Iranian output rather than the widely discussed “zero tolerance” policy. This is because we believe a complete cutoff of Iran exports would send oil prices up sharply just ahead of the US midterm election.

Moving from a 0.5mn to a 1mn b/d Iran export curb would push Brent prices up by $8 to $9/bbl, on our estimates. In our view, US sanctions could prove ineffective if rising oil prices largely make up for any lost Iran volumes.

…but Saudi has never pumped more than 10.6mn b/d

So could King Salman instruct Saudi Arabia to increase production and make up for any missing Iranian volumes? Perhaps. But going back to 1970, we observe that the highest annual average production recorded by Saudi was 10.4mn b/d in 2016. More recent history shows Saudi has never produced more than 10.6mn b/d on average over a single month.

And even in the recent period, we have observed a steep decline in domestic Saudi oil inventories. Thus, it appears the oil market has little confidence that Iran volumes can be easily replaced. Of course, dealing with a new set of Iranian crude oil export restrictions would be easier if other ailing OPEC+ deal members like Venezuela, Libya, Angola, Mexico, or Nigeria were able to simply maintain their production levels.

If Saudi can’t fill the gap, demand may have to slow

With OECD oil inventories coming down and the oil market poised to remain in deficit, the core question here is if Saudi can fill the gap as the US increases the pressure on Iran. Alternatively, we may just face an episode of oil demand destruction, although a strong USD backdrop could set a lower oil price cap. In different words, it may be hard to see Brent trading a lot higher than $100/bbl if the EUR drops to 1.12, as our FX team expects.

How high could oil prices go from here? It may be complicated politics, but it is simple math. We estimate that every million b/d shift in S&D balances would push the oil price by $17/bbl on average. So based on those assumptions, we estimate zero Iran exports could push oil up by $50/bbl if Saudi caps out. We expect in this game of chicken, someone will blink before that happens.

49 Comments on "Bernstein: Oil May Jump Past $150 On Chronic Underinvestment"

  1. MASTERMIND on Mon, 9th Jul 2018 4:16 pm 

    We learned nothing from our near death experience in 09..And the global economy never recovered..This next oil price spike will likely be the final nail in BAU..

    Mothers will be eating their babies…God help us!

  2. MASTERMIND on Mon, 9th Jul 2018 4:16 pm 

    We learned nothing from our near death experience in 09..And the global economy never recovered..This next oil price spike will likely be the final nail in BAU..

    Mothers will be eating their babies…God help us!

  3. Bob Jones on Mon, 9th Jul 2018 4:36 pm 

    So, TRUMP, the Super Baby Booomer is mad at China (major exporter to US), Iran (major world oil exporter), and Venezuela (major oil exporter).

    Baby Boomers sure know how to pick the wrong enemies. Then again, when did the spoiled brats ever take responsibility for anything.

    ME generation, Yuppies, Conspicuous consumption, free love, sex/drugs/rock’n-roll, FREEDOM/DEMOCRACY/HOMOSEXUALITY, porn, McMansions, War on Terruh.

    I’m not saying ALL, just as a group Baby Boomers are a shit generation.

  4. Boat on Mon, 9th Jul 2018 4:57 pm 


    Actually Trump ran on changing from international corporations first to something else. We’ll have to watch to see what developes. The glaring huge deficits and huge immigration additions is how he got elected. Nobody had ran on that platform before. Boomers had little to do with those issues. Why? Both parties had supported corporations first. Not much of an option at the voting booth.

  5. Boat on Mon, 9th Jul 2018 4:59 pm 


    Many of us did just fine during the 07-09 crash. And have done well since. Your a drama queen.

  6. Outcast_Searcher on Mon, 9th Jul 2018 5:09 pm 

    If there actually is a problem which doesn’t get corrected by market incentives with $100 or $125 oil — then good. That’s part of the good that markets do, is price signaling.

    And a side effect of sustained roughly $150 oil prices should be a nice push toward vehicles using less gasoline, more EV’s, etc.

    So that’s all good too.

    And as to the author’s assumption about being able to predict future oil prices under various scenarios — GOOD LUCK with that. And if he’s really that good, why is he writing and not making $billions trading oil futures?

  7. Outcast_Searcher on Mon, 9th Jul 2018 5:10 pm 

    Ah, what would this place be without the constant mindless drivel from Mini-mind, AKA Master-mindless?

  8. MASTERMIND on Mon, 9th Jul 2018 5:16 pm 


    You think high oil prices are good? Wow..High oil prices cause inflation in 90% of all manufactured products, all commidites, food prices, and decrease consumer spending and confidence..

    You are energy illiterate and peak oil ignorant..

  9. MASTERMIND on Mon, 9th Jul 2018 5:19 pm 


    Tell that to the 10 million full time workers who lost their jobs during the last recession..

  10. Boat on Mon, 9th Jul 2018 5:28 pm 


    And an insensitive Obama/GW who brought in around 10 million immigrants to add to unemployment. Which was caused by GW creating a free wheeling market with lacking enforcement. Typical corporation first Republican lobbying payoff. Dems get some credit also.

  11. GregT on Mon, 9th Jul 2018 5:32 pm 

    “Many of us did just fine during the 07-09 crash.”

    Some of us did very well by the ’08 downturn. It really wasn’t all that difficult to foresee where things were heading.

  12. MASTERMIND on Mon, 9th Jul 2018 5:43 pm 

    The dream of driverless cars is dying

  13. Boat on Mon, 9th Jul 2018 5:47 pm 


    I was adding dollars to the market during the downturn and did quite well. You?

  14. MASTERMIND on Mon, 9th Jul 2018 5:50 pm 


    Just wait till the oil shortage hits soon and hyper inflation kicks in..Hope you like paying 100 dollars for a loaf of bread..

  15. Roger on Mon, 9th Jul 2018 5:58 pm 

    “How high could oil prices go from here? It may be complicated politics, but it is simple math. We estimate that every million b/d shift in S&D balances would push the oil price by $17/bbl on average. ”

    Really? I’m assuming they’re speaking to demand destruction to rebalance S&D…and I don’t buy that a $17/bbl bump will remove 1 MM bbl/d of demand.

    My guess (“estimate”) is that Americans are the marginal consumers (i.e., where the demand destruction will occur) and that it will take $5/gal gas before any serious changes are made….and probably $200/bbl for 6 months to destroy 1 MM bbl/d of demand.

    But then, who really knows…we’re headed into uncharted waters.

  16. MASTERMIND on Mon, 9th Jul 2018 6:06 pm 

    Why is it always a meth head hillbilly that claims racial superiority?

  17. GregT on Mon, 9th Jul 2018 6:24 pm 

    “I was adding dollars to the market during the downturn and did quite well. You?”

    Gold and silver.

  18. MASTERMIND on Mon, 9th Jul 2018 6:32 pm 

    I’ll be voluntarily dead shortly after the food and electricity goes away for good..

  19. Makati1 on Mon, 9th Jul 2018 6:40 pm 

    “I’ll be voluntarily dead shortly after the food and electricity goes away for good..”

    In other words, you will commit suicide and wimp out long before the food/electric ends. Why, because you are a coward and too stupid do anything to prepare for the coming change in BAU. Your fatalism will deny you a full life in a world less affluent than you are used to. Too bad!

  20. DMyers on Mon, 9th Jul 2018 7:22 pm 

    Outcast argues the benefits of higher oil prices, a new order of incentives leading in the right direction.

    MM argues that the detriments of oil-fueled inflation outweigh the benefits. He correctly identifies the detriments.

    I’m going with Outcast on this. This is the evidence. On Chart 24 of the article, it shows a substantial increase in oil exploration expenditures in the 1978-1985 zone. Speaking from personal recollection, this was a time of [relatively] high oil prices. Higher expenditures were directly related to higher prices.

    We’re damned if we do and damned if we don’t, but the better probabilities lie on the path to higher prices.

    Oil is grossly undervalued, simply as a function of cumulative price inflation (i.e., dollar devaluation). On average, prices have increased by about ten time since 1970. In 1970, I paid $.389 for a gallon of premium. Today I paid $2.709, far shy of the $3.899 if we were to follow the trajectory of inflation.

    The price of oil must absorb its share of this inflationary spiral over many years. At that point, it will price much higher, but its net gain since 1970 will be little, if any, more than zero.

  21. MASTERMIND on Mon, 9th Jul 2018 7:46 pm 


    During the mid/late 20th century (1960-1999), a barrel of oil cost $19 on average; during the years immediately prior to the Great Recession (2000-2008), the average price of a barrel of oil had increased to $47; and during the years immediately following the Great Recession (2010-2012), the average price of a barrel of oil had further increased to $81. During the same three time periods, the average price of a metric ton of copper increased from $3,085, to $3,713, to $6,817; the average price of a metric ton of iron ore increased from $36, to $57, to $124; and the average price of a metric ton of potash increased from $114, to $185, to $343. (Prices are inflation adjusted.)

    The simple fact is that we cannot grow our global economy and improve our global material living standards on $55 oil, $6,817 copper, $124 iron ore, and $343 potash like we did on $19 oil, $3,085 copper, $36 iron ore, and $114 potash. It should come as no surprise that our Non Renewable Resource-dependent global economy experienced the Great Recession during 2009. Nor should it come as a surprise that we have yet to recover from the Great Recession. Nor will our industrialized and industrializing economies ever recover, so long as price levels associated with the vast majority of Non Renewable Resources remain at their inordinately high levels.

    Source: Hamilton (2009)

    Source: IEA

    Source: IMF

  22. deadly on Tue, 10th Jul 2018 3:50 am 

    The ’08 market correction was a no brainer if you had some cash to invest. You won’t make a dime unless you sell later on down the road.

    CME Oil Futures

    Quite a bit of info on that board.

    Oil futures at 58 usd for Dec 2021.

    Demand is destroyed every day when I park my truck, I don’t need to burn gas at all for a couple of days at a time.

    Makes gas more affordable when you use less.

    For the most part, I try hard to not buy too much, you can get by with less.

    Oil isn’t what is really needed to get what I want, but it is the most desirable. I can walk, ride a bike, a horse, buy a coach and four, but for the most part, a vehicle that uses gasoline or diesel fuel is the best choice and the most desirable. Gets the most done with the least amount of effort.

    That is the reason why people use gasoline and diesel fuel, it is just the best choice available.

    The next beer run will be another great day for a drive to the brewery to buy a couple hundred more barrels of beer.

    If there are only one million people demanding oil, refined products, then the volume of the demand will be low, but high for the one million who want oil.

    Desire versus need, desire always wins, first place at that.

    I need a place to dwell, not at the local landfill inside a Coleman tent, fits the need, but not what I want. The desire for a thirty million dollar mansion trumps a tent, every time.

    Since there are 7.6 billion lost souls wandering the planet in search of harmony, more oil will be used, even after the cows come home.

    There are floating cities that entertain people on the ship’s deck. 27.2 million people vacationing on cruise ships in one year doesn’t have to be. Represents desire, not need.

    I want a forty-foot motor home with a 200 gallon fuel tank and a diesel ice engine to generate electricity for the refrigerator so I can drink cold beer while I drive to oblivion, a place where everybody is and nobody wants to be.

    At eight miles to the gallon, you can stay on the road for sixteen hundred miles.

    Flying a private jet is ok, but it has to land. You will run low on beer even at ten kilometers up in the air.

    Beer time, again.

  23. Davy on Tue, 10th Jul 2018 4:40 am 

    This article asserts demand increases and this has generally been the case with the occasional demand destruction episode. Yet, we should consider the day when the finite reality of this planet curtails demand growth. At some point the average may be demand destruction. A question then arises with a demand destruction paradigm shift of can our system survive this change? Maybe it will not ultimately survive but for a reasonable amount of time survive. We then should ask ourselves are we set for a slow decline phase of demand destruction where adaptation and utilization of existing reserves is more than adequate. We will likely see renewables cause further demand destruction but renewables too will be influenced by a decline in growth.

    Deflation is destructive. It leads to abandonment and decay. This is not all bad because there is a cleansing power of decline and decay. We are forced to choose that which has value and in the case of decline. Sustainable value is sought out by instinct. People get rid of toys for tools and wine for water. We are partly there in some ways in the macro. Civilization is clearly hitting limits. We are talking about it and seeing. We are also seeing growth and the madness and greed of the impulse of growth. A significant amount of this growth is unproductive bad growth. This bad growth is in need of a purge but with current policies is not getting purged. It also is the case that bad growth is needed to urge on good growth that complicates the equation even more. So what happens is an undulating plateau of growth and decline. There are plenty of forces of growth available still and the human urge to fulfill growth. Wealth is also being transferred around and not in good ways. Productive segments are being starved for parasitic segments. Some of this is creaming by the rich but also some are social decay and bad behavior of all social classes.

    This might seem like a diversion from the topic of oil price but oil is the blood of life so at least in the longer term we have to look at life itself to understand where oil might go. I bring up demand destruction, decline, and decay because if this becomes the dominant force that breaks out of this undulating plateau of our current stagnation then oil prices will never surge and if it does it won’t be for long. This might not be a bad thing and this period could be a time of cleansing and sobriety. People may actually find a period of boring good behavior pleasing. That said it is also the case that any decline that is too strong or too fast may be more than our unstable system can handle. Have we come too far with unhealthy growth that the systematic backbone of civilization is now unstable? Are we way overdrawn with our natural, social, and civic account? We then must ask ourselves will demand destruction be short lived and the results a teetering near catastrophic collapse? Will this be localized by nation or by sectors within nations? What can we do now to prepare and defend against this? Actions related to defense are deflationary so if we do seek defense we are seeking decline.

    As you see oil price is really just part of our existential lifeline. Life is about trying to escape death. This is the same with civilization. Are we in a zone of change both destructive and constructive of an undulating plateau? If so which force will become dominant and when? This should be the question for where oil prices will go longer term. The longer term seems to be drown out for shorter term forces but the two forces can’t be separated so to understand the short term the longer term must be tuned in. If decline and decay are the future then we may see a ceiling on prices and relative value. There will be enough oil and what will be lacking is growth based forces. There might be less affluence and more problems but it will not be because of oil.

    I hold these views but I also understand this might be years off and in the meantime of the next decade we may be under the influence of growth for many reasons one big reason is population growth and the increase in affluence of these new people. In this case in the near future yes oil might surge but my view is the strength of these surges will be on the wane. It is like a boil that steeps. I mainly want to call into question this whole idea generally from academics and journalist of the unending growth meme. We are in the vicinity of change and evidence of destructive change is everywhere.

  24. peakyeast on Tue, 10th Jul 2018 5:16 am 

    @Boat: I was the only one that did well during the crash of the people i knew.

    Most people i knew back then ended up with 300-400K$ in debt – and the richest of them has only just now gotten back up to 0$ net worth.

    That should tell you that personal anecdotal evidence are wildly different.

  25. JuanP on Tue, 10th Jul 2018 5:52 am 

    Deadly “Desire versus need, desire always wins, first place at that.”

    If your needs are not satisfied then you won’t be around to have desires. My guess is you’ve always had your needs satisfied so you don’t understand this. You need to hydrate, nurture, shelter, and protect your body; everything else is just superfluous.

  26. MASTERMIND on Tue, 10th Jul 2018 6:41 am 

    World Bank CEO Adds to Voices of Worry Over Global Debt Pileup

    Central banks across the world are under pressure to follow a Federal Reserve that’s raising interest rates faster than initially anticipated, putting particular stress on emerging markets and developing economies. The need for structural policy changes, including responses to waves of anti-globalization, remains great as policy makers in most economies haven’t taken sufficient action during the extended period of low borrowing costs, Georgieva said.

  27. print baby print on Tue, 10th Jul 2018 6:45 am this is our reality to the very end God bless the humans

  28. MASTERMIND on Tue, 10th Jul 2018 7:01 am 

    White male privilege can easily be defined as a mindset that perceives equality as a personal loss..

  29. Boney Joe on Tue, 10th Jul 2018 7:04 pm 


    God forbid. Why do you give a damn what two consenting people do in the privacy of their home? I have learned that those who complain the loudest (numerous Republicans) turn out to be the very people they so freely condemn. Fucking hypocrites.

    Get a life, pal.

  30. Davy on Tue, 10th Jul 2018 7:08 pm 

    boney juan, get a life and just be yourself. quit the puppeteering nonsense.

  31. Boney Joe on Tue, 10th Jul 2018 7:15 pm 

    When I was a boy of 12, my next door neighbor of 16 asked my folks for permission for us to go camping. My parents agreed without a moments hesitation since Johnny was an Eagle Scout and, as Mom would say, he looked as beautiful as an angel. While camping, Johnny dropped his drawers and asked me to perform fellatio. Thinking this was a new game, I did as requested. It never happened again. The point being, homosexual acts are far more common then people imagine, and, no, it did not “scar” me for life nor affect me in the slightest.

  32. Davy on Tue, 10th Jul 2018 7:17 pm 

    Hence your “Boney” Juan name.

  33. JuanP on Tue, 10th Jul 2018 7:24 pm 

    Delusional Davy “boney juan, get a life and just be yourself. quit the puppeteering nonsense.”

    Thanks for all the times you make me laugh, exceptionalist! You are insanely funny! LOL!

  34. Makati1 on Tue, 10th Jul 2018 8:01 pm 

    Juan the key world is “insane”. He and MM are both certifiable.

  35. Davy on Tue, 10th Jul 2018 8:08 pm 

    3rd world, when are you going to get a puppet to play with like Juan and his gay bony juan?

  36. Boney Joe on Tue, 10th Jul 2018 8:16 pm 


    Did the Republican truism hurt your little feelings. You are the absolute worst kind of hypocrite.

    DDT, your thoughts reflect AND project perfectly like a mirror; the subconscious perceptions that are held about the Self. What you fail to comprehend is your frequent bullying and incessant assaults are a perfect reflection of your present state of mind and how you feel about yourself on the inside. Your resentment and anger toward others reveals anger and contempt of yourself, rooted in jealously, fear, and a sense of failure with who you are, questioning your ability to aptly compete with others.

    DDT, use this knowledge to become more self-aware and introspective. By doing so, you can diffuse inner conflict and confusion and become a pacifist of the mind rather then a bellicose, xenophobic, and hateful Trumptard of the mind.

    DavyDonaldTurd (DDT), clean-up your act, now, before it’s too late. The clock is ticking and the hour is late.

  37. Davy on Tue, 10th Jul 2018 8:18 pm 

    shut up boney juan, the puppeteering is getting old. It is not like it is hard to figure out.

  38. JuanP on Tue, 10th Jul 2018 8:43 pm 

    Delusional Davy “shut up boney juan, the puppeteering is getting old. It is not like it is hard to figure out.”

    You are projecting again, Exceptionalist! You are so much fun. I love coming here and reading your latest delusional rants. You complete my days! Keep up the good work! Thanks!

  39. JuanP on Tue, 10th Jul 2018 8:50 pm 

    Delusional Davy “3rd world, when are you going to get a puppet to play with like Juan and his gay bony juan?”

    I am thinking of using multiple identities here like the exceptionalist does. I was just LOL just thinking of soing it. I think it would be extremely funny. Thanks for the idea, exceptionalist; it was your continuous false accusations that gave me the idea and now I am filled with anticipation. This is going to be so much fun!

  40. Boney Joe on Tue, 10th Jul 2018 8:59 pm 

    “Hence your “Boney”

    DDT, aren’t you the clever (not to mention sleazy, greasy, grimy, and plain gross) little cancer monkey.

  41. JuanP on Tue, 10th Jul 2018 9:08 pm 

    Hi Joe, Davy is all wired up and has been claiming for days that I am the one signing in under the name “Boney Joe”. I hope it doesn’t bug you. He is insane. I find it funny.

  42. Boney Joe on Tue, 10th Jul 2018 11:00 pm 


    Now it all makes sense…… your fixation on gay sex and why you relocated to a desolate dump of an area that’s proudly known as the Mecca for deplorables. You’re near the interstate for truck stop and rest stop hookups with hairy trucker types. Additionally, you have plenty of trailer parks to choose from (prey on), and as a frequent flyer you pay just $5.

    Man, you’re in homo heaven.

  43. Boney Joe on Tue, 10th Jul 2018 11:07 pm 

    Greetings Juan:

    No, his shenanigans don’t bother me in the least. He continues to prove the case that he is truly an irredeemable and contemptible thing. He would keep an army of shrinks busy for years. He goes out of his way to be nasty and rude, and everything he says is suspect.

  44. Makati1 on Tue, 10th Jul 2018 11:11 pm 

    Davy, i don’t have a split personality, therefore, I do not need a sock puppet to keep proving what a delusional, insane person you really are. It is so obvious to anyone here, that only you need puppets to hide behind.

    I prefer being myself and telling it like I see it.

  45. MASTERMIND on Tue, 10th Jul 2018 11:15 pm 

    Boney Joe

    Davy doesn’t go to truck stops or rest stops to get laid..He just goes on the and finds a long lost cousin to bang..

  46. MASTERMIND on Tue, 10th Jul 2018 11:30 pm 


    Trump just hit China with another 200 billion in tariffs..HAHA

    China is going to collapse first..

  47. Makati1 on Wed, 11th Jul 2018 12:11 am 

    Mm, dream on! Trump is destroying the Us economy and will likely start a civil war before his time is over.

    China is not afraid. It is going to hit back even harder with their own tariffs and other weapons of economical destruction.

    Like, not buying any more Us debt and dumping their USTs And USBs in big bites. Trump seems to forget that China holds over a trillion dollars in USTs.

    Not to mention that most of the things Americans need comes from China directly or indirectly.

    No, Trump is killing the Us and stupid Americans, like you, are cheering him on.

  48. Makati1 on Wed, 11th Jul 2018 12:19 am 

    BTW MM: “Trump just hit China with another 200 billion in tariffs.”

    Sorry, but, no, he did not. A threat is not an actual event.

    “The Trump administration escalated a mounting trade war with China on Tuesday by publishing a list of $200 billion worth of Chinese goods that …it proposes to… hit with an additional 10 percent tariff….

    The U.S. last week imposed a 25 percent tariff on $34 billion worth of imports China including plastics, chemicals, machinery, boat parts, flash drives, thermostats, batteries and remote controls. It is also poised to impose another round of 25 percent duties on an additional $16 billion worth of Chinese goods as early as August.”

    Now, when did Trump actually impose that $200B tariff list? LMAO

  49. MASTERMIND on Wed, 11th Jul 2018 12:31 am 

    Leave some ladies for the rest of us, Rando

    Is he trying to get a date with Milo Yannonopolis?

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