Oil, the commodity that has been wreaking havoc over the energy industry for more than a year has been headed up in recent weeks, hovering above $50 per barrel Friday as global oil powers continue to mull production caps.
But with the rise many on-lookers may be wondering if we are heading back to the days of $100 oil, a level at which just about all producers -- from the diversified big wigs ExxonMobil (XOM) - Get Report, Chevron (CVX) - Get Report, Royal Dutch Shell (RDS.A) to smaller drillers like Chesapeake Energy (CHK) - Get Report and Pioneer Natural Resources (PXD) - Get Report -- can make money.
Industry experts have told The Street, however, that investors shouldn't hold their breath as we may never see $100 oil again even if OPEC and the world's largest producers hit the pause button on increasing output.
The reason: global growth is abating and the type of growth we saw during oil's previous run up to a high of around $150 in June 2008 may never be replicated.
Case in point, China. After decades of exponential growth that turned the country into a global powerhouse -- projecting for years GDP growth of 8% -- the world's largest economy has in recent years lowered those estimates, putting downward pressure on the global demand. Troubles in other markets including India, Brazil and Africa have also had their affects on the commodity.
For China in particular, in a matter of 20 years from the mid 1990s to the early 2010s, the People's Republic of China built 200 cities with a population of 1 million or more people. Such an enormous growth cycle drove demand up, and, paired with declining drillable U.S. reserves, arguably helped push oil prices to $100 per barrel earlier in the decade.
And it certainly played a pivotal role in fueling the global supply glut that persists today for the commodity, according to Paul de Janosi, a board member of U.S. Shale Solutions and a senior adviser for energy-focused management consulting firm SSA & Company.
"If you think about all the natural resources it took to build those cities in 20 years or less, it's clear that the commodity glut has been largely driven by China," de Janosi said in an interview with TheStreet. "But they're all built now. They may not be fully populated, but these cities are built."
So the question now is: Is there another big wave coming, and if so, where?
The first thought might be India, or perhaps Africa. But de Janosi points out that India doesn't have the infrastructure to support such a build out.
And Africa would have many more obstacles in the way of accomplishing such an industrial explosion, not the least of which would be the need for subsidies from China, Europe and the U.S., among others, de Janosi explained.
To put in perspective how big of an affect China's growth has had on the global oil market, one need only look at the United States, which recently turned 240 years old and had a whopping 10 cities with more than 1 million people in 2015.
The bottom line is, without another similar massive driver of demand, there's very little fundamental support for a world where $100 per barrel oil makes sense, de Janosi said.
Many industry followers continue to point out, however, that the underlying supply-demand imbalance reeking havoc on commodity prices will eventually correct itself.
But recent movement in commodity prices continues to support the thesis that this is not a market that trades on supply and demand, but rather one that trades largely on sentiment, according to Kate Richard, CEO of Oklahoma City-based oil and gas exploration and production company Warwick Energy.
Sentiment surrounding OPEC's talks to freeze production at current outputs certainly has put some pep in the commodity's step, but will it last?
"Under our models, considering where the break-even point is now, the new reality is that oil may be a $35 to $55 per barrel commodity for some time," Stephens Inc. analyst Matthew Marietta said. "Now the industry is beginning to adapt to lower oil."
Indeed, SSA's de Janosi fears the persisting downturn will force exploration and production companies to rework their capital expenditure structures so extensively to support lower-cost extraction that prices may never come back up.
After all, an E&P's primary method of creating value for investors is drilling wells and pumping oil out of the ground, and if enough of these companies can find a way to resume doing that near previous levels when oil is at $50 per barrel, it could further perpetuate the current supply-demand imbalance.
"If this lasted a year to 18 months, I'd think we'd be set to come back up to $60, but now I just don't know." de Janosi said. "I don't know if we see $100 oil again in our lifetime."
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