However, market analyst Cyril Widdershoven wrote on May 3 that behind the seemingly endless stream of bear market news, a new bull market has formed.

The crude oil market is facing an unprecedented crisis. The epidemic has severely damaged demand, and OPEC+ has proven unable to prevent the collapse of oil prices. However, market analyst Cyril Widdershoven wrote on May 3 that behind the seemingly endless stream of bear market news, a new bull market has formed. Crude oil producers are working hard to cut spending and costs. In the past 10 years, investment levels have been well below the required normal levels. This may prompt oil prices to fluctuate upward, and 2021 may become a bull market year for crude oil.

Crude oil producers' efforts to cut spending and costs may ultimately prompt a rebound in oil prices

Nearly every oil and gas company in the world is cutting capital expenditures and operating costs due to a sharp decline in revenue, sluggish demand and excess oil reserves. This is the first step in what could be a sharp rebound in oil prices. One might argue that the main long-term support for oil and gas prices is the current crisis. As global oil and gas majors, independents and state-owned oil companies announce deep spending cuts and austerity measures, some optimistic investors are already looking to the future.

As the global economy slowly reopens, few believe that demand or prices for crude oil will soar later this year. The market expects daily crude oil demand to drop to 30 million barrels in May. In this case, expectations that oil prices will average $35-40 may appear too optimistic.

Norwegian consultancy Rystad Energy expects EP budgets to be cut by around $100 billion by 2020. The consultancy warned that if oil prices remain below $30 a barrel in 2021, total cuts could reach $150 billion. That's a staggering number, but earnings reports from international oil companies such as Shell back it up. Reports from these companies make clear that the industry is struggling to remain viable.

Rating agency Moody's is more optimistic and expects oil prices to rebound in the medium term. The agency predicts that long-term oil prices will fluctuate between US$50 and US$70 per barrel. In the short term, Moody's is less optimistic, arguing that the impact of capital spending cuts will spread from E&P companies to oilfield services companies.

Shell announced last week that it will cut underlying operating costs by $3 billion to $4 billion annually over the next 12 months from 2019 levels. They also announced they would cut cash capital spending in 2020 to $20 billion or less from a planned roughly $25 billion. French oil giant Total has also cut capital expenditures by more than $3 billion and plans to cut operating costs by $800 million in 2020, after announcing it would cut operating costs by $300 million and suspend its buyback plan. In addition, U.S. oil giant Exxon Mobil Corp. has said it will further cut crude oil production.

U.S. oil giant ConocoPhillips has begun cutting its 2020 capital projects by about 10%, or $700 million, while Chevron is targeting $2 billion in cost savings. International oil companies are not the only victims. The U.S. shale oil industry encountered a financial crisis, Canadian factories closed down, and OPEC+ had to reach a new production reduction agreement to try to stabilize the market.

All hopes are pinned on voluntary or government-mandated production shutdowns to reduce the oil glut and prevent oil storage facilities from filling up. However, these measures are not a viable long-term strategy, as a complete shutdown of 25-30 million barrels per day is unrealistic. The most likely scenario after the epidemic is that most of the production cuts will have to be put back into production.

The serious lack of investment has not attracted enough attention, but this may cause oil prices to fluctuate upward.

Market analyst James Skinner pointed out: "Despite the overwhelming bad news, we have reason to remain optimistic. At present, the market is a major factor in oil and natural gas production." Fundamental factors have not been given enough attention. For nearly 10 years, investment levels in oil and gas have been well below what normal markets would require, amid falling oil prices, the OPEC+ conflict, Trump tweets affecting oil prices, and the collapse of the global economy. Against this background, serious underinvestment has not attracted much attention.”

In his view, the main support factor for oil prices in the next 12-18 months may come from underinvestment in replacing mature oil fields. Even in a doomsday scenario, where oil demand is 10 million to 15 million barrels per day below 2019 levels after the epidemic until the end of 2020 or 2021, we will need more production to restore production.

James Skinner said that U.S. shale oil, North Sea oil and Canadian producers, coupled with the increasing lack of investment in low-cost oil production areas, will usher in a new "perfect storm" market, this time may lead to oil prices Oscillate upward.

Analysts should be aware that zero investment in existing production could result in production declining by 6%-12% annually. Although there are about 70,000 oil fields in the world, about 25 oil fields account for a quarter of global crude oil production, 100 oil fields account for half of global production, and as many as 500 oil fields account for three thirds of global cumulative proven reserves Two-thirds.

Most of these "giant" oil fields are relatively old, and many of them are well beyond their peak production. Most of the remaining oil fields will begin to reduce production in the next 10 years or so, and few new giant oil fields are expected to be discovered. Therefore, the remaining reserves, future production and reserve growth potential of these fields are critical to future supply. The continued lack of investment that began about 10 years ago is one of the most important factors affecting today's oil markets.

The bursting of the shale oil bubble may grab a lot of headlines, but most oil supply will continue to come from larger fields. Declining oil production from non-OPEC countries and declining production from natural oil fields is harmful. If the market does not realize this and continued underinvestment, oil prices will rise much faster than most analysts expect. 2021 may be a bull market year for crude oil.

Reduced investment, layoffs and outright lockdown measures are major obstacles to a rapid and effective recovery of supply worldwide. The remaining obstacle may be 10 years of investment deficit.

(Brent crude oil price daily chart)