With the fluctuations in oil prices, investing in oil wells has become an attractive investment opportunity for many investors. However, the oil investment cycle can be unpredictable and risky. Understanding the dynamics of supply and demand as well as the stages of the investment cycle is crucial before putting money into oil wells. This article will provide insights into the oil investment cycle and advice on investing in oil wells.
Oil prices drive the investment cycle in oil wells
The oil investment cycle follows a pattern tied to oil prices and profitability. High prices lead to more capital expenditure and expanded production. But this increased supply then causes prices to fall again, making investments unprofitable. We are currently in a phase of oversupply and low prices, which has led companies to slash investments in oil wells. However, this sets up the conditions for eventual undersupply and a potential price rebound.
Oil shale production is declining rapidly in the US
US shale oil has been very responsive to the lower prices, with rig counts and investment plummeting. Shale wells require constant reinvestment to keep up production levels. With less capital expenditure, shale oil output has already begun declining steeply in the US. This points to a future supply crunch.
Maintaining aging oil wells requires heavy investment
The geology of Venezuelan oil wells makes them harder to access and maintain than wells in other regions like the Persian Gulf. Constant injections of water or gas are needed to keep output flowing. Decline rates are also nearly twice as fast as in the North Sea, meaning constant spending on new wells is essential. After nationalization and political turmoil, Venezuela’s state oil company PDVSA lost many skilled employees and saw maintenance spending plunge, leading to permanently reduced capacity.
Current prices are too low to spur new investments
At current low spot prices, most potential oil investments globally are simply uneconomical. Oil companies have already made deep cuts to capital expenditure budgets, likely over 20% in 2015 alone. If prices stay depressed, investment could collapse further, sowing the seeds for serious future supply shortages relative to demand.
In conclusion, while investing in oil wells can be profitable during certain periods of the commodity cycle, the industry is very capital-intensive and sensitive to price swings. Companies need to understand the supply and demand picture as well as political risks before committing significant funds.