Ah, the joys of predicting oil and gas prices. I don’t think anyone at the end of January would have predicted that oil would have hit $40/bbl in mid-March, a mere six weeks later. Won’t stop anybody from trying to predict future prices, of course. We’ve given up on it here a Nuttall Legal. Here are some the articles we’ve read about it in the last month.
It’s looking like oil prices are going to be low for a long time. During this period of high production by, well, everyone, stockpiles of oil have risen to 1 billion barrels. To put that into perspective, the world uses about 94 million barrels of oil each day. (That’s more of a guesstimate than a precise number, but it’s close.) World use has grown by about a million barrels per day each year over the last few years, meaning that in 2014 we were using about 93 million barrels per day, in 2013 we were using about 92 million barrels per day, and so forth. Those are rough numbers, of course. Here are the official EIA numbers. To be perfectly honest, nobody really knows exactly how much oil the world uses because reporting is imperfect and there’s a black market that’s unreported. However, based off what we know, oil production would have to completely stop for about 10 days for us to work through the stockpiles of oil we know we have. A halt in production like that would require the kind of worldwide catastrophe that would make us not care whether oil was being produced. What we’re getting at here is that once there is a freeze or a cut in oil production it’s going to be a long time before the surplus oil will be used up. That’s going to keep oil prices down for a lot longer than some people think. We’ll say it once again, go ahead and plan that great American road trip for this summer.
Southwestern Energy is not drilling any new wells this year. That will definitely contribute to a decline in gas production. However, gas production in the Marcellus shale has been 2 billion cubic feet more than anticipated. This because of increased efficiency by drilling rigs and new pipeline being opened. It’s still an overall decrease in production, but not by nearly the amount anticipated.
For another perspective on oil prices, read this Foreign Policy article. In it, Robert Mosbacher, Jr. hints that by 2017 we are going to see a massive shortage of oil and a corresponding increase in oil prices. He also says that we’re going to see immense boom-bust cycles coming up. He thinks that the Saudis should have done what they could to keep oil prices in the $40-$60 range. At that range fracking would have been marginally productive, with some areas being economically producible and others not. He says that the Saudis have not accepted the fact that they are no longer the world’s swing producer. It’s hard to fault his reasoning. Looking at the numbers he floats, it would take about six months (roughly) to burn through the 1 billion barrels of oil that are now stockpiled around the world. By 2017, which is when he suggests that oil production will drop off enough to start to be felt, we may have quite a bit more in the way of stockpiles. But at a burn rate of 5 million barrels per day you can burn through 1.85 billion barrels of oil in a year. Just another point of view to think about.
This Reuters article points out one of the reasons that oil and gas prices are going to be low for a while. Frackers are using new techniques to increase production from new wells. They are decreasing the distance between frack stages and clusters, increasing the amount of frack fluid, increasing the amount of sand, and moving high speed rigs to the sweet spots in the respective plays. All of these things bring production from each well up, and consequently bring the cost per barrel or MCF down. Increased efficiency means that fracking can be profitable at lower energy prices. The Saudis unleashed the beast and they don’t have any way to bring it back.
We’ve also reached a national low. There were fewer drilling rigs operating in the United States then there have been since 1940. We expect to see that number get even lower before it starts to increase.
This article from Seeking Alpha says that oil prices aren’t going to climb above $50/bbl until the end of 2017.
This article from fuelfix.com says that it’s not as important to drillers what the price of oil (or, presumably, gas) actually is. It’s more important to have the money to drill. And apparently banks are still willing to finance oil drillers to a certain extent. It seems that some gas drillers are also a good bet. Range Resources has a $4 billion line of credit, and have only used $95 million of it. Even better, the borrowing base won’t be redetermined until May of 2017. That’s a lot of money to keep the lights on, and it’s good for a long time. We’re expecting gas prices to start to recover by then.
On the other hand, it looks like gas prices are going to stay down for at least most of this year. That article points out that it’s likely to be a mild summer, gas storage is above the five year average, and production hasn’t really slowed down much yet. Of course, that doesn’t take into account the LNG exports that have begun and the natural increase in gas usage from economic growth. The catastrophic drop in prices the article predicts are unlikely, but a recovery is also unlikely.