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Page added on March 2, 2015
Could Oil Prices Plummet A Second Time?
Are oil prices heading for a double dip?
The surge in shale production has produced a temporary glut in supplies causing oil prices to experience a massive bust. After tanking to a low of $44 per barrel in January, falling rig counts and enormous reductions in exploration budgets have fueled speculation that the market will correct sometime later this year.
However, there is a possibility that the recent rise to $51 for WTI and $60 for Brent may only be temporary. In fact, several trends are conspiring to force prices down for a second time.
Drillers are consciously deciding to delay the completion of their wells, holding off in hopes that oil prices will rebound, according to E&E’s EnergyWire. The decision to put well completions on hold could provide a critical boost to the ultimate profitability of many projects. Higher oil prices in the months ahead will provide companies with more money for each barrel sold. But also, with the bulk of a given shale well’s lifetime production coming within the first year or two, it becomes all the more important to bring a well online when oil prices are favorable. With prices still depressed – WTI is hovering just above $50 per barrel – drillers are waiting for sunnier days.
Related: Here’s What Will Send Oil Prices Back Up Again
Yet another reason to wait is the possibility that costs for well completions will decline. Oil and gas companies often contract out well completions to third parties, and those companies will face pressure to cut their fees in order to keep business. That works in favor of producers who put their projects on hold for the time being. Well completions can make up as much as three-quarters of the total project cost.
Several prominent shale drillers have confirmed they are undertaking such a wait-and-see strategy. EOG Resources, one of the biggest Texas shale drillers, announced its plans in late February to hold off on completions. Chesapeake Energy and Continental Resources have now followed suit.
“We’re intentionally holding production back in 2015, because we believe it’s the prudent thing to do,” Doug Lawler, Chesapeake’s CEO, said in a conference call. Chesapeake has said it may delay completing as many as 100 wells. EOG has 200 wells awaiting completion, a backlog that will intentionally rise to about 350 this year.
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As the industry clears out that queue of wells awaiting completion, a rush of new supplies could come online, pushing WTI prices down once again.
Related: US Will Never Gain Oil Market Crown Says IEA Head
Even with well completions being suspended, supplies continue to build. The latest EIA data shows that oil stocks in the United States climbed to 434 million barrels, the highest levels in storage in over 80 years. “My gut feeling is that the oil price could see a double bottom,” Jason Kenney, an analyst with Banco Santaander SA said in a Bloomberg interview. “We’ve got too much inventory.” Bloomberg noted that Kenney has a good track record of predicting price swings in the past. Even though rig counts have declined significantly, output has so far proved resilient.
Finally, there is some evidence that the ability to move excess oil into storage may run into trouble if production does not decline. Storage tanks are starting to fill, raising the possibility that a glut could worsen. There is a great deal of uncertainty around how quickly this might happen. The EIA sought to clarify, noting that the markets have confused some of its storage figures – some oil supplies in the EIA’s weekly inventory data is actually sitting in pipelines and at well sites, meaning there is more storage capacity available than many news outlets had originally thought. An EIA analyst recently told Bloomberg that overall storage capacity is only at about 60 percent, and “[w]e still have a way to go before we can consider ourselves to be full,” Rob Merriam, EIA’s head of petroleum statistics said. It would take a few months of strong inventory builds to fill up the remaining storage, perhaps an unlikely scenario, especially if production starts to take a hit. But if storage tanks did start to fill up, prices would dive once again and companies would have to shut in wells and cut back on production.
Rig counts are at six year lows, forcing oil prices up on speculation that supply reductions will soon relieve the oil glut. But a double dip cannot be ruled out.
By Nick Cunningham of Oilprice.com
19 Comments on "Could Oil Prices Plummet A Second Time?"
Perk Earl on Tue, 3rd Mar 2015 1:50 am
Sure, bring on the double dip!
Richard Ralph Roehl on Tue, 3rd Mar 2015 3:24 am
Doesn’t matter. The $tudent loan $cam-program is creating a permanent debtor class. The next generation can’t afford a car or a house. 10 cents a gallon will still be too expensive.
Davy on Tue, 3rd Mar 2015 7:05 am
I would say this is an example of the bumpy descent. Demand and supply destruction in a vicious cycle down along with all the other POD’s & ETP of oil. It is just inevitable that oil as our foundational commodity will deplete and at some point destroy BAU. The complexity of BAU cannot be energy intensity starved.
These WS investment ideas are short term in nature and part of the ongoing financialization of our critical foundational resources. Ideally the markets would be removed from this process and a centralized authority would take over production and distribution. Of course this would lower supply and demand but it would do so in a fair, balance, and more rational way.
BAU must end slowly to avoid a mass die off. Lifestyles and attitudes must be changed soon and made drastically lower. We have no viable options for BAU on any level except actively embracing adaptation and mitigation of the fall of BAU into dysfunction, irrationality, economic abandonment, and entropic decay. These financial market strategies are not fine because they are BAU at its peak entropy of complexity. How else can you describe something so important being played around with like a casino? Billions could die and we entrust our foundational commodity to the greedy traders. Sounds ludicrous to me.
rockman on Tue, 3rd Mar 2015 7:15 am
“Drillers are consciously deciding to delay the completion of their wells, holding off in hopes that oil prices will rebound, according to E&E’s EnergyWire”. First, the obvious: drillers don’t decide when to complete a well…the operator does. That’s probably just sloppiness of their part. More to the point: there’s no publicly available data to indicate how many completions are being delayed but the Rockman talks to those service companies that do the work almost daily. It appears that the number of wells being completed far exceeds the number being suspended. Again: cash flow is KING. Completing a well can cost less than half of the total capex expended but the revenue still greatly exceeds the costs especially since the frac’ng companies have had to greatly reduce the price the charge operators.
One major shale player told the frac’ers they could have all its completions…and they would be paid only on the 2004 price schedule. And if the service companies didn’t like that deal they could leave their equipment in their yards and watch them gather dust.
Though the Rockman doesn’t frac EFS wells he does use some of the same service companies. And those prices are running about half of what they were 6 months ago. Frac’ng an existing well costs considerably less than it did just a few months ago.
buddavis on Tue, 3rd Mar 2015 8:49 am
Good points rock and agree completely. Seing the same things and have spoken with operators in the Permian who feel like their prospects are becoming economical again after seeing their costs decline by 40%.
As for sloppiness, how many times have you seen a pumping unit in the paper to represent the rig count?
My opinion of journalists is they know enough about any given topic to be truly dangerous with their reporting, but not enough to speak intelligently with people who know what they are talking about.
Plantagenet on Tue, 3rd Mar 2015 10:51 am
Always good to get the inside story from Rock.
Service companies always cut their prices in an oil glut. Oil companies cut staff and try to cut costs to operate with lower oil prices. This has the perverse effect of keeping the oil companies drilling and extending the oil glut.
I wouldn’t be surprised to see the oil glut get worse resulting in another oil price drop.
Davy on Tue, 3rd Mar 2015 11:20 am
Planter, are you practicing subliminal glut marketing? You constantly repeat the glut thing. That reminds me, you all remember when for a time commercials would come on for just a fraction of their play time like 10 seconds there by effecting your mind by an imprint. I guess they outlawed that tactic because I am not seeing them anymore. I know I got side tracked but that flashed into my head for some reason talking about Planter and his subliminal marketing tricks. Planter, do you think us old timers here are going to fall for your marketing 101 trick? Nope. Your oil glut marketing is really a faux glut caused by demand destruction.
Plantagenet on Tue, 3rd Mar 2015 11:56 am
Did you read the article, Daver? Its about the oil glut.
There is nothing notable about discussing the oil glut in a thread about the oil glut.
What is weird is how many folks here refuse to acknowledge that we are in an oil glut.
Davy on Tue, 3rd Mar 2015 11:59 am
No, planter I admit to a demand destruction oil glut. I just find your marketing 101 subliminal seduction amusing with the constant use of oil glut.
Kenz300 on Tue, 3rd Mar 2015 12:02 pm
So why do we need tar sands from Canada?
So why do we need the Keystone pipeline?
Plantagenet on Tue, 3rd Mar 2015 12:06 pm
Daver
You can “admit” to a demand destruction oil glut, but it does’t match the actual facts. Both oil production and oil consumption hit record levels in 2014.
Nope—this oil glut is due to a surplus of oil production. The price drop in oil comes fro the downward pressure the oil glut puts on prices, combined with KSA’s decision to drop their oil prices to maintain market share.
Plantagenet on Tue, 3rd Mar 2015 12:08 pm
@Kenz
Obvously we don’t need tar sands oil or the Keystone Pipeline right now. But the oil glut will be temporary. In the future we’ll need more oil if we don’t shift to a non-carbon economy.
Get it now?
marmico on Tue, 3rd Mar 2015 12:35 pm
And those prices are running about half of what they were 6 months ago.
Great. Keep up the good work excising the lard from the U.S. oil patch and reducing the marginal cost curve to $60 WTI. Let consumers not producers get fat for the next 10 years.
GregT on Tue, 3rd Mar 2015 1:24 pm
“Let consumers not producers get fat for the next 10 years.”
Gasoline at the pumps here today, $1.33/ L. Up 34% from the 99 cent low at the beginning of January, and only 16 cents from the all time record high of $1.49 reached in the fall of 2008. Gasoline prices continue to rise, and remain higher than twice the price of only ten short years ago.
Some humans have extremely short attention spans.
Jim on Tue, 3rd Mar 2015 3:12 pm
I’m a bit curious,how much damn storage is
available both on land and at sea? I was wondering how or why would there be so much storage to begin with? Have we had empty or near empty storage for years? And
why were they built or for what purpose?
More curious really.
Thanks Jim.
Jim on Tue, 3rd Mar 2015 3:14 pm
I’m a bit curious,how much damn storage is available both on land and at sea? I was wondering how or why would there be so much storage to begin with? Have we had empty or near empty storage for years? And why were they built or for what purpose?
More curious really.
Thanks Jim.
Davy on Wed, 4th Mar 2015 6:47 am
Here is a good explanation of the oil glut:
http://www.zerohedge.com/news/2015-03-03/crude-parallels-river-denials
Crude Parallels: A River Of Denials
“Again, those comments were made in late September 2008, only a week away from unrelenting and outright panic (of banks, by banks). People, investors especially, just don’t want to believe nowadays in the worst case or even a bad case. If economists say that the economy is getting better or at least there was very little downside to the real economy, as they did throughout 2008, then that message is taken at face value regardless of all contrary logic and plain common sense.”
“In review of that period, actually demand for oil did fall that much and not just in the US but everywhere in the world. The liquidations in oil, as in stocks and credit, were just the signals of that as bank balance sheets contracted (for “dollars”, as the global “dollar” short grew desperate). The rise of the “dollar” was merely the expression of imbalance of finance in the face of drastically shortening economic fundamentals. It was fashionable to blame “speculators” for all of it, but that was just a symptom again of how far imbalances had gained.”
“That put the nearly 80% drop in the price of oil in perspective, as the financial imbalance driven by “speculation” was wholly misplaced as the state of the real economy was obscured by what amounted to nothing but monetary faith. Yet, that was pervasive enough for commentary, during the worst economic quarter since the 1930’s, to continue to only “worry” about just the possibility of recession.”
“So there is nothing new here in 2015 as the same set of circumstances combines, to varying degrees, for the fact that oil prices are being seen as falling for some reason other than renewed economic dislocation. The only twist has been a role reversal, whereby the US was assumed the weakened participant in 2008 and now is the “cleanest dirty shirt.” But as 2008 demonstrated, just not well enough to become convention apparently, there is no separation or “decoupling” as the global economy was the global economy. The 80% collapse in oil was entirely appropriate as “demand” collapsed pretty much anywhere and everywhere – and therefore financial liquidations were just as proper calling into question not speculators but exactly what basis they were speculating on in the first place (monetary policy is not neutral!).”
“As I noted a few weeks back, it is exceedingly difficult to say that US supply has been “unexpectedly strong”, as that has been the case for almost four full years. There is nothing about supply that was unexpected, and if some factor changed so drastically as to produce a nearly 60% collapse in oil prices, and likely some new liquidations in leveraged positions, it was again bank balance sheet contracting the supply of leveraged “dollars” on less-than-robust forecasts for global “demand.” The vastly “rising” dollar and collapsing oil prices are the same powerful tendency….. Recency bias no doubt once again playing a role, but more likely it is this new-ish trend to deny any damaging economic possibility as it might disrupt the balance of financialism. Any system that cannot even countenance just a small possibility of contrary thought is not robust or “resilient” at all.”
Davy on Wed, 4th Mar 2015 7:11 am
More paper distortion and delayed pain from our US oil concerns:
http://www.bloomberg.com/news/articles/2015-03-04/oil-at-95-a-barrel-discovered-in-sec-rules-on-reserves
Dredd on Wed, 4th Mar 2015 3:21 pm
The price of poison is all over the place.