New Oil Supply and Institutional Yield... Correlative?

According to the Wall Street Journal, July 30th, 2018, "Crude oil is being used faster than its being replaced."

How can that be?  Amid seemingly daily reports on oil supply, demand, over supply, under demand with traders hinging on every word of the IEA, reduced spending on new projects could be the harbinger of a price spike that could be far more than just a spike.

Worldwide, the oil industry needs to add 33 billion barrels of oil a year to satisfy anticipated oil growth, while only delivering an estimated 20 billion barrels this calendar year.  This production deficit could push prices well over $100 per barrel states Energy Aspects.  Nevertheless, this dearth of funding could set up the industry for the potential of a windfall for investors, large and small alike.

Enter the institutional investors seeking yield. A random study finds returns of 10.8 - 20% were solidly accepted as 'great' returns, with some exceptional yields of 35% an anomaly.  What is the correlation between the much needed new oil supply and institutional yields?  One would suppose that a consistent yield of 25-30% IRR would be of interest?  If new projects could be set into motion using existing production, with the investment consistently earning returns hovering above 25%, the both sides could be far better business partners that the traditional energy banks.

The potential 'three legged stool' of capital need, capital provision and a commodity price that can support high yields … without the market risk can't be ignored. This is a prime time for these three components to band together while the metrics are there ready to be exploited.  As an old musical line goes, "Now's the time, the time is now!"

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