Oil prices have risen this year amid the conflict with Iran. Brent oil, the global benchmark, rose more than 50%, jumping from around $60 a barrel to more than $90. Fortunately, Brent is currently well below the peak of $120 a barrel, which was reached in the early days of the war. Crude has cooled amid hopes that the US and Iran will reach a peace deal that includes reopening the Strait of Hormuz.
Many people outside the oil industry believe that oil prices will fall quickly once the Straits are reopened and remain low for years to come. However, the CEO of a Global Oil giant A shell(NYSE:SHEL) has a different perspective. He expects oil prices to continue rising long after the war ends. Here’s why and what that means for oil stocks.
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An oil rig with the sun in the background.
Image source: Getty Images.
Pressure builds up over time
Shell CEO, Wael Sawan, believes that oil and gas prices will continue to rise well after the end of the current conflict in the Middle East. That is largely due to the expectation that global oil demand will continue to grow. Because of this, oil companies will have to continue to innovate to reduce production and the depletion of legacy oil fields.
That creates a problem. Sawan told the attendees of the Wall Street Journal Leadership Institute Summit that although the oil industry can meet the needs of the world (once the Straits are reopened), it will be a big challenge going forward. That’s because “all the light oil and gas has been found.” As a result, oil companies will have to pursue resources that are currently uneconomic to explore and develop. Prices will need to rise to make it profitable to use the resources the economy will need in the future. That continues his view that “prices will rise, [which is] a matter of five to 10 years [ahead].”
The importance of assessment
Shell is already investing to help support future demand growth. The company aims to add one million barrels of oil equivalent (BOE) per day to its output by 2030 through the approval of new projects. Additionally, it is looking at future opportunities to expand its product. For example, the company has acquired acreage in Angola and South Africa to explore new resources. It is also exploring opportunities in Kuwait and Venezuela. This investment will enable Shell to meet future global supply needs and take advantage of rising prices.
Most of the other major oil companies are also investing to find and develop future reserves. For example, last August, ExxonMobil(NYSE:XOM) acquired a large block offshore Trinidad and Tobago (UD1). It is close to the company’s Stabroek block in Guyana, where it has acquired 30 properties totaling BOE 11 billion. ExxonMobil recently sold a 10% interest in UD1 to Occidental Petroleum(NYSE:OXY)which will now help fund its portion of the research and development costs. Exxon initially plans to invest $42 million in seismic testing and exploration wells, which could pave the way for nearly $22 billion in future investments to develop the field. UD1 can have a huge impact on the growth of these oil companies, they are able to make money from increased demand and prices.
Meanwhile, Occidental, and our partners Chevron again Woodside Energythey recently discovered oil in their Bandit field in the Gulf of Mexico (also known as the Gulf of America in the US). Bandit is close to another Occidental-based facility, which it can tie into to support its future development. Occidental also signed a 15-year concession agreement in Oman last year for a potential resource of more than 800 million barrels. These measures will enhance Occidental’s ability to capitalize on future growth in the oil industry.
Oil could be much higher in the future
Oil prices may drop in the near term once the Strait of Hormuz is reopened. However, Shell’s CEO sees them increasing over time, due to increased demand. That clearly shows that oil companies are actively exploring new resources, as it will give them fuel to increase production and capitalize on higher prices in the future. This view makes oil stocks look like a compelling long-term investment.
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Matt DiLallo holds positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a policy of disclosure.
Shell CEO Warns Oil Prices Will Continue to Rise Long After War Ends. Here’s What That Means for Oil Stocks. was first published by The Motley Fool
