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Oil prices have risen sharply in recent months. This is usually a recipe for madness from American oil producers. But something strange is happening or rather it is not happening.
“American manufacturers are actually limited at the moment,” said Helima Croft, global head of commodity strategy at RBC Capital Markets. “They’re trying to be disciplined.”
Oil companies are under great pressure to reduce production. And the call comes from inside the house: it’s butter investors who are urging companies to pump less oil.
To find out why, it helps to take a little trip back in time.
Over the last decade, the fracking revolution has caused US oil production to skyrocket. Watchful-eyed investors poured huge sums of money into oil. Even after oil prices plummeted in 2014, they saved companies on the brink of bankruptcy and waited for all their investments to pay off.
Instead, “the people who came in and invested money in work … burned out,” said Dan Pickering, chief investment officer at Pickering Energy Partners.
This is a simple principle of supply and demand: the more oil sold, the less each barrel costs. That is why members of the OPEC oil cartel are negotiating with each other to preserve global supplies, limit volatility, raise prices and improve end results for producers.
But American oil producers do not coordinate in this way. They turned all that Wall Street money into as much oil as they could pump – oversupply and price restraint. When they did make money, they poured it back into more wells instead of taking it for profit.
This left many companies to exaggerate, to borrow and to fight – and that was it before the pandemic caused an acute crisis for the entire oil industry.
How bad was that for investors? Manas Satapati, managing director at consulting firm Accenture Strategy, cites exchange-traded funds such as PSCE and FRAK, which track the performance of many US oil producers.
If you invested a dollar in 2016, you would lose about 60% of your investment by early 2021. If you invested the same dollar in the S&P 500, you would double your money.
Of course not everyone money lost in the oil boom. Investors who defined it correctly saw a return, oil directors received high salaries, and oil workers and the businesses that serve them had very good years.
But many of the big banks, pension funds and other investors who financed the oil boom saw nothing close to the return they had expected.
“Many investors have left with bad taste in their mouths and will not return soon,” Satapati said.
Stephen Sen / AP
This eviction is not just about recent returns. Concerns about climate change and long-term prospects for oil are also growing.
Scott Stringer, the supervisor in New York, works with a board of trustees to manage one of the largest public pension funds in America.
The city recently withdrew $ 4 billion from these pension funds from fossil fuel investments, both in the name of fighting climate change. and protection of the bottom of the fund.
“The data isn’t lying,” Stringer said. “These are not investments that will increase the pension fund.”
Governments, including the Biden administration, are pushing for a faster transition from fossil fuels. This global action on climate change raises huge questions about the long-term prospects of the oil and gas sector as an investment.
And what about today?
The energy sector is currently on the rise as oil prices rise amid signs of global economic recovery.
But even investors who stick to oil and gas are putting a lot of pressure on companies to rein in.
And that makes a big difference. Many oil producers need Wall Street money to fund new wells. Investors control the strings. And right now, investors just aren’t impressed with how many barrels a company says it can break.
“Investing for growth is not what investors want,” said Pickering of Pickering Energy Partners. “Growth has brought us more barrels. It has given us too many barrels. It has received low prices. It has given us a poor return.”
Less oil, more money in hand: In short, this is what oil financiers require. And in return, executives have vowed to take responsibility and focus on oil profits.
With revenue calls this spring, CEOs who once boasted about how much oil they can pump are now defending themselves against every new drilling rig they use.
The change has not gone unnoticed by analysts, investors – or rivals.
“The doctrine, my dear, the doctrine is gone forever,” said Saudi Energy Minister Abdulaziz bin Salman with a smile. OPEC + controls supplies, and bin Salman said shareholder interests would push US producers in the same direction.
But will it really be forever?
Oil companies love to drill for oil. This is something they do. And as prices rise and rise, they may struggle to stick to the strict goals they are committed to.
This remains a concern for oil investors who adhere to, according to Rebecca Fitz of the Boston Consulting Group’s Energy Impact Center.
“The fear is that companies are starting to throw all their money away to grow,” she said. “It is on number to watch next year. ”