Will We See $100 Oil Again?

This is not the "$64,000 Question".  This is the $64 billion dollar question.  The entire structure of the oil business depends on it.

Barely six months ago, Chevron's announced that it was budgeting with $110/b oil for 2017, with the company’s CEO John Watson stating, “There is a new reality in our business… $100/bbl is becoming the new $20/bbl in our business… costs have caught up to revenues for many classes of projects.”

Brent this morning is $72, nearly $40 / barrel below Chevron's 2017 guidance.  Should we reduce our expectations, or is $110 still good?  Or was Watson's estimates of cost perhaps too pessimistic?

The answer to this question is literally existential.  For BP, it determines whether to keep the company or sell it.  For TransOcean and SeaDrill, it is the difference between survival and bankruptcy.  For the Norwegian government, it is fundamental in understanding the path of the Norwegian economy and whether to keep or sell its holdings in Statoil and Aker Solutions.

If you take a traditional, demand-constrained view of oil markets, then low oil prices are here to stay.  The marginal cost of shales is estimated at the high end at $85, and at the low end at $70 (and potentially even lower by Citi).  If that's true, then shales will  just expand to fill any incremental demand growth.  BP is sold, Transocean is toast, and Aker Solutions should have been sold in mid-2013 (which is what I recommended at the time, by the way).

On the other hand, if you take a supply-constrained approach to markets (our specialty), then the question is not so simple, and we could see $100+ oil again, and in the not so distant future.  If you believe that, then it's pedal to the metal.  You're making big bets on low access markets.  Deepwater is pushing hard to acquire positions and lock in low day rates.  You're making opportunistic acquisitions.  It's a time to be a predator, not prey.

Fight or flight.  Either choice is possible.  But whichever way you make the call, you better damned well get it right.