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IEA Report Will Please Oil Bulls And Bears

Posted: Nov 17, 2009 11:16 AM by Eric Fox

Tickers in this Article: NYSE:RDS-B, SU, CVX, XOM

The International Energy Agency (IEA) presented a mixed picture for oil demand going forward in a series of recently released reports. The agency raised its short-term demand estimates, but cut long-term demand estimates slightly. It also warned about falling investment levels by the industry.

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The IEA released its annual World Energy Outlook assessment last week, which estimated that global oil demand would grow 1% per year through 2030, moving oil demand from 85 million to 105 million barrels by that year. This wasn't a huge cut, as the IEA predicted global oil demand of 106 million barrels per day by 2030, in last year's report. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

The IEA Remains Cautious
In another report, the IEA also had a carrot for oil bulls. It raised oil demand estimates for 2010 to 86.2 million barrels per day. This was the fourth straight month that the agency raised estimates, and it highlights the slowly building economic recovery underway.

The IEA also had some cautionary advice for the world's energy producers, as it worries about under investment in new supplies for the future. Global upstream spending is set to fall by $90 billion in 2009 from 2008, a drop of 19%. The IEA feels that these levels are inadequate to supply future needs.

Royal Confirmation But Canadian Slow Down
Some commentary from the industry seems to confirm this drop in spending. Peter Voser, the CEO of Royal Dutch Shell (NYSE:RDS.B) recently said that the company would spend anywhere from $2 billion to $4 billion less in 2010 than in 2009 on capital projects.

Many of the earlier cuts in capital spending were made to projects tapping the large deposits of oil sands in Canada. In January 2009, Suncor Energy (NYSE:SU) halted the expansion of its oil sands operations. The company just announced that its capital spending for 2010 would be $5.5 billion CAD, with some limited expansion of oil sands projects.

Still Spending
Some of the other major integrated oil companies have not made deep cuts yet. Chevron (NYSE:CVX) has spent $16 billion on capital expenditures in the first nine months of 2009. This was up slightly from the same period in 2008. Eighty percent of this is dedicated to the upstream segment, and Chevron hasn't officially announced what it would spend in 2010 in that area.

Exxon Mobil (NYSE:XOM) has also kept its capital plan on track. During the first nine months of 2009, the company spent $18.8 billion, down 3% from 2008. The company blamed the slight decline due to the strength of the dollar. In all of 2008, Exxon Mobil spent $26.1 billion in capital in all its segments.

Exxon Mobil has repeatedly stated that it is sticking with its five-year capital plan despite the recent volatility in oil prices. The plan calls for spending between $25 billion and $30 billion each year.

The Bottom Line
The IEA report is well followed in the energy industry despite the difficulty in predicting demand so far in the future. The more important part of the report, and the one that should be listened to the most, is its warnings on the investment needed to supply energy in the future.

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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