One wild card in the oil prices card deck is Libya. That country has had civil war since it deposed Gaddafi (how many ways are there to spell his name in English?) in 2010. Production of oil dropped from about 1.6 million bpd to about 300,000 bpd today, with a low of 80,000 at one point. If they can get their act together, they might be able to get back to 1.6 million or more. There are signs that the two sides are reconciling, but it’s impossible to predict. They’ll have some rebuilding to do, too. This article gets into the subject a little more.
The Cleveland Federal Reserve says that natural gas production has evened out, but isn’t growing. This is from the Beige Book, which is not based on statistics, but anecdotal accounts, so make of it what you will. It’s definitely not forward looking, but is a good overview of what has happened recently.
There has been talk about building cracker plants in the Ohio River Valley for years. Now talk is starting to pick up about some infrastructure that would support those plants, a storage and pipeline complex that would stretch hundreds of miles along the Ohio River Valley from Monaca, PA to Catlettsburg, KY with a spur running from Charleston, WV following the Kanawha River to the Ohio River. Dubbed the Appalachian Storage Hub, it would hold 110 million barrels of liquid ethane.
There are two big suppliers for oil and gas drillers, Halliburton and Schlumberger. Both are confident that drilling is picking up.
Consol Energy is re-starting its drilling program. Unfortunately for our clients, it’s going to be in Ohio and Pennsylvania only. As we still have an abundance of gas I think it’s unlikely that Consol will begin drilling or even taking leases in West Virginia in the near future. We’ll have to see gas prices hit $3.50/MCF consistently before that happens, I believe.
Speaking of gas prices, today is July 27, 2016, and prices have been slowly sliding down from a high of about $3.00/MCF a couple weeks ago. This is in spite of hot weather increasing demand for natural gas for power generation. The decrease in price would have to be because we still have a lot more gas in storage than we have had in the recent past, and with the increase in gas prices a few drilling rigs have been brought back online. Production numbers are dropping off, but not quickly. We won’t hit storage capacity at the end of storage season like some people were predicting this spring, but we will still have record amounts of gas in storage.
Bloomberg.com says that the fracklog (total number of drilled but not fracked wells) is beginning to shrink. The article only treats oil plays, but the same thing holds true for gas plays. Drilling has slowed, and fracking old wells can be quite a bit cheaper that drilling new ones, so it makes sense to do that first when gas prices start to climb.
Marketwatch.com says that falling oil prices are due more to a strengthening dollar than to any fundamental changes in supply and demand. Long story short, oil is bought and sold with US dollars. When the dollar goes up in value (strengthens) you need more Saudi Arabian riyals to buy the same barrel of oil. If buyers don’t have more riyals to give for the same barrel of oil, the price of that barrel of oil has to go down. Lately the US dollar has been strong, so the price of oil has been dropping. This kind of thing doesn’t affect natural gas prices right now because natural gas is mostly a national commodity. As we export more and more LNG we may begin to see the strength of the dollar begin to affect LNG prices, too.
Here’s an argument from nakedcapitalism.com that says we’re likely to drop to $36/bbl again pretty soon. The long and short of it is that once prices hit $50/bbl for a little while investment money started to flow to developers, and developers started drilling, and drilling increased oil supply, and since we have tons of oil in storage already the little bit of extra supply decreased the value of oil. Pretty sensible, really.
This Reuters article goes into a lot of what I’ve been thinking regarding what’s going to happen when oil and gas prices start to really recover. The only thing it doesn’t touch on is whether banks and investors will be willing to put money into oil and gas right away. I won’t summarize the article because there’s not much fluff. Take a few minutes to read it. It’s well worth it.
July 29, 2016: So, this time of year refineries are shutting down for scheduled maintenance. That means we won’t be using about 1.2 million barrels of oil per day for a while. Since it’s scheduled, maybe the markets have planned for it and it won’t affect the price of a barrel of oil. Maybe it will. It will be interesting to see.
An article from NGI (subscription required) says that a lot of previous oilfield workers are not coming back to work in the “patch”. They got burned last time, and don’t plan on getting burned again. Can’t say that I blame them. The market is improving, but there is no promise of a boom this next time around. In fact, horizontal fracking may make it so that there is never another boom. Interestingly, the lack of skilled workers could bring about another boom, as companies need skilled workers to produce, and if there’s not enough skilled workers we could end up with a lack of product, which will result in a high price.
Forbes has an excellent article which points out that oil has been overpriced for most of this year. I was constantly surprised, pleasantly surprised, but surprised nonetheless, as I watched oil prices rise like they did. when they hit $50/bbl and stayed close to it for a while I figured a lot of people knew something I didn’t. I knew that production numbers had dropped off, and figured that that must have been the reason prices were climbing. Now that oil prices are dropping again I think maybe I was smarter than I realized. That’s always a nice thought, even if it’s after the fact. Now I am of the opinion that speculators drove the price up, and they’re driving it back down. There was never a good fundamental reason for the price of oil to be or stay up. We have a surplus of over 3 billion barrels (maybe quite a bit more unreported). While production has dropped off, we would have to see ridiculous drops in production to really chew up a significant amount of that 3 billion barrels.
Here’s an interesting experimental technique for fracking rock that’s worth looking at. Hard to say if it will be better than hydraulic fracturing, but it will be interesting to follow.
August 5, 2016: gas prices are still hovering around $2.70-$2.80/MCF. This is in spite of a drawdown on natural gas reserves instead of an increase in storage reserves. We took 6 billion cubic feet out of storage last week, and prices still aren’t going up much. This article says it’s probably because we’re coming to the end of the summer, and speculators, er, investors are staring down the barrel at the end of September, all of October, and part of November when demand for natural gas will naturally be going down. Can’t say as I can disagree with ’em.
An article over at kallanishenergy.com says that drilling is going to pick up again in early 2017. The demand for the gas is there, as DUCs (drilled but uncompleted wells) are diminishing, down from 2600 in October 2015 to 1500 in May of 2016. The only thing to do when DUCs run out is to drill new wells. Makes sense.
Over the last few days people have been listening as OPEC talks about possibly cutting production. Oil prices have gone up just a bit because of it. People are just nuts. It makes no sense for OPEC to cut production. If they do, they will lose market share (clients, sales, long-term contracts) to American companies. We can ramp up production very quickly and absorb small, short-term demand. Large, long-term demand might be a little harder, but not much harder. Saudi Arabia will not cut production because if they do they will lose customers. Iran is still increasing production, Venezuela would love to sell oil for a higher price and will do so any chance it gets, if Libya gets its act together they could bring another million barrels per day online in a year or so, American producers can drill wells and have them online within a few months. It’s rather like Whack-A-Mole. One place stops producing, another will pop up with additional production. Don’t forget about the 3 billion (yes, billion with a B) barrels of crude oil that are in storage around the globe. Even if worldwide production stopped completely it would take us an entire month to use up all the crude that’s in storage. It just doesn’t make sense for Saudi Arabia to cut production, so OPEC won’t be able to come to an agreement. I suppose that a very short-term cut in production, something less than three months, might be beneficial as it would cut into the global storage numbers some. Longer than that and American companies will be bringing new production online. It doesn’t make sense for OPEC to cut production.
It’s August 15, 2016 and oil prices finally dropped again. The recent increase in oil prices was ridiculous and founded in speculation that OPEC was going to freeze oil production. Such speculation was completely driven by speculators, people who make money on rumors. Since it was OPEC saying they might agree to a freeze, I wouldn’t be surprised if some people in charge at OPEC made a lot of money playing the futures market.
