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.

A study by Deloitte is saying that oil and gas companies have underspent over the last couple of years.  They haven’t put enough money into developing new resources.  That means that sometime in the next few years we’re going to see a shortage of new oil and gas reserves coming online, which will lead to a shortage of oil and gas on the market, which will lead to high prices for oil and gas.  When will the producers learn to manage themselves properly?

Natural gas prices are still near $2.75/MCF.  Injection into storage was a little higher than expected for last week, but below last year’s number for the week and below the five year average for the week.

$50/bbl oil seems to be the point where at least some producers want to start bringing on new drilling rigs.  Whether that’s going to last is up to the Saudis and Iran.  The Saudis can increase oil production by 1 million barrels per day practically overnight, and by another 1 million barrels per day in about six months.  That would drive prices down.  Iran is halfway to the 4 million barrel mark, which is the amount it was producing before sanctions and which is its goal for future production.  Between Saudi Arabia, Iran, and American companies, it’s unlikely that we’ll see prices much over $50/bbl for a little while.  Higher prices are coming, though.

Because of Brexit the dollar is up, the markets are in turmoil, and oil prices are dropping.  Natural gas prices, however, are still around $2.70/MCF.  Decreased production is the reason.  It’s all about the fundamental supply/demand balance.

David Einhorn sees gas prices going up, essentially because of a lack of supply.  This Seeking Alpha article sums up his five points, but “lack of supply” sums up the article.

Stone Energy has re-opened it’s Mary field here in West Virginia.  Gas prices have risen enough, and Stone obviously expects them to stay high.

Here in West Virginia we’re more interested in what happens with natural gas prices, and the market forces are different enough for natural gas from oil that what affects oil won’t directly affect natural gas.  However, when oil prices drop a lot natural gas prices often drop a lot too.  Consequently we keep tabs on oil.  Also, people in general want to know what’s going on with oil prices because that affects the price at the gas pump.  So, here’s a good summary of what’s affecting oil prices right now.  It’s short enough that it doesn’t warrant our own summary.  The last paragraph is the most interesting to me.

Oil prices have moved up, and the oil industry thinks things have stabilized.  If I were an oil driller, I’d be doing everything I could to keep the good people in my business on board.  Not that prices are going through the roof any time soon; they’ll probably stay below $60 until the second half of next year.  I’d be figuring out how to produce oil (same goes for natural gas) in the current market at a profit, and the only way to do that is with good people.

July 1, 2016, and gas prices hit $3.00/MCF.

Here we are on July 21, 2016, and gas has dropped to $2.69/MCF and has spent some time below that price.  I suppose that investors took a look at gas production, gas storage rates, and the amount of gas in storage, and realized that (spoiler!) we still have a ton of gas!  Paying $3.00/MCF just didn’t make sense.  Maybe we’ll hit that this winter when we start using more gas than we produce.  Of course, this weekend is supposed to be a scorcher across a good chunk of the country, so maybe prices will bump up when next week’s storage report comes in lower than expected.  Who knows?  It’s sure fun to speculate, isn’t it?

I can say one thing for sure, leasing seems to be picking up.  We picked up two new clients in the last week or so, and have a couple more who we expect to come on board in the next few days.  We have at least one call a day from someone who needs to know what an oil and gas lease is all about.  The drilling companies seem to think that higher gas prices are here to stay.

The DUCs are back in the news.  Not that they ever left.  Oil companies are starting to bring their Drilled but UnCompleted wells online.  The reason they are bringing them online is that oil prices have stayed above $40/bbl for about a month.  The money invested in those wells is sunk cost at this point, and it won’t take as much to complete them as it will to drill new wells, so it’s cheap product for the companies that own them.  Wood Mackenzie’s Alex Beeker thinks that the number of DUCs will drop by 400 next month.  Considering that there were about 1700 in March, that’s a big drop.

Two more natural gas fired power plants are being planned in Pennsylvania.  Link is to Marcellus Drilling News, where we get a lot of our oil and gas news.

Eclipse Resources drilled a well with a lateral of 18,500 feet.  That’s 3.5 miles!  That’s a long well.  They drilled it in 18 days!  That’s fast.

Tim Maverick with Seeking Alpha thinks that Mexico’s demand for natural gas is what’s going to keep the U.S. natural gas industry alive.

A study has shown what natural gas has done for the manufacturing industry in the United States.  We always knew that itw as a good thing, but now we have actual numbers.

The United States is still the worlds largest producer of petroleum and natural gas hydrocarbons according to the US EIA.  Anyone wondering why we have an oversupply of either only needs to take a quick look at the first chart in the article.  Go USA!  OK, so we actually kind of shot ourselves in the foot.  Not just kind of, but dead on from point blank range.  But if you’re one for tradition it should make you feel good to know that the oil and gas industry has been doing exactly this since its inception.  Produce as much as you can while the demand and price are high.  Overproduce while the price drops.  Get out of the market or go bankrupt when the price drops so low you can’t make money.  Everybody left continue to produce until the market stabilizes.  When prices start to climb get back in the game and start producing again.  Lather, rinse, repeat.

In the same vein of thought, gas storage numbers were greater last week than they were last year for the same week.  However, they were below the five year average.  The article suggests that the slightly lower numbers are because of restrictions on production more than anything.  That makes sense.  We have fewer rigs running than at any time since we started keeping track of that, and production is actually starting to drop off across the US.  I expect production to continue to drop off for the rest of the summer and fall.  If prices rise above $2.50/MCF we might see more rigs fired up, but we might not.  It’s possible we could hit storage limits this fall and if we do producers won’t have much incentive to drill new wells.

This article at The Week, a British site, suggests that breaking through the $50/bbl price will be a boost psychologically to the price of oil.  Now that it has done that, people actually think that it will stay up there for a while.  The article includes a pretty good overview discussion of the price of oil and the economy, and is worth a few minutes to read.

OPEC met again, and didn’t accomplish much.  What they did accomplish was to agree to a new secretary general, Sanusi Barkindo of Nigeria.  Previously, the secretary general was Abdulla al-Badri.  Saudi Arabia and Iran had pushed hard for their own replacement candidates over the last few years, resulting in al-Badri being automatically extended.  It’s interesting that the new secretary general is from Nigeria, a country that is having serious troubles with civil war and rebels blowing up the country’s pipelines.  OPEC also was able to agree to admit a new member, the country of Gabon.

Now that prices are at $50/bbl and kind of seem to be stable around that number, everyone is wondering whether shale drilling is going to pick back up.  This article over at oilprice.com doesn’t have answers, but analyzes the current situation well.

Natural gas prices have hit and exceeded, but not stayed consistently above, $2.50/MCF.

Here’s someone who thinks that $50/bbl oil isn’t going to last.  He starts out talking about stock market factors which, to my mind, aren’t as important as production/demand.  But then he gets into the oversupply, pointing out that there are a whole bunch of tankers sitting offshore full of oil just waiting for the price of oil to go a little higher.  Seems like a bad move to me, but that’s not my line of business.  Regardless, those tankers are going to have to unload at some point, and they hold a good chunk of the 1 billion to 3 billion extra barrels of oil that have been floating around for a while (no pun intended).  I’ve personally been mystified by the increase in oil prices.  I haven’t seen what I thought was enough of a cut in production to warrant the significant increase in price.  I wouldn’t be surprised if the price of oil did take a dive for a while.  I’ll be more confident that oil prices are going to stay up when American frackers start setting idled rigs back up.

RBN Energy is doing a two-part series about LNG and its effect on the natural gas market.  Since most of what we produce here in West Virginia is natural gas and RBN Energy does very well-researched work, this is highly recommended reading.

A Tennessee man, Pat Riley, has coordinated a coast-to-coast road rally to show off the possibility of CNG.  Apparently you can travel coast-to-coast on CNG because there are enough fueling stations to do so.

OilPrice.com points out that when oil and gas prices start to rise (which they have been recently) it might be hard for oil and gas companies to find the skilled workers they need to start production back up in a timely manner.  We’ve mentioned this possible problem in previous State of Oil and Gas posts.  If that’s the case, we may be in for a roller coaster ride of oil and gas prices in coming years.

This article at oilpro.com says that DUCs won’t get completed in large numbers until oil hits $100/bbl because the companies won’t be able to finance the fracking of the DUCs.  We might be staring down the beginning of really high oil prices.  In oil and gas, worldwide supply and demand are the main factors, but financing and money drives everything else.

The Saudi strategy of producing enough oil for anyone that wants to buy from them makes it harder for alternative energy sources to get funding.

In the last month people have become more confident that gas prices are going to climb.  Gas production is dropping off and demand is increasing.  It shouldn’t be a whole lot longer before leasing activity picks up and royalty checks start getting bigger rather than smaller.  Following are the articles we’ve read in the last month that we think are interesting or important for West Virginia mineral and royalty owners.  Enjoy!

Natural gas-fired power generation is increasing.  This article gives some numbers.  Also, the majority of gas-fired power plants are in shale gas producing regions.  Big surprise, that……

It’s the day after OPEC met at DOHA, and oil prices haven’t dropped much.  Now that’s a surprise.  Why did it only dip a little?  Oil workers in Kuwait went on strike.  That’s really odd timing.  I’d like to think that it’s coincidental, and it may be as Kuwait really doesn’t want to cut back on production in spite of low oil prices.  It just seems like awfully good timing.  Prices stay up for a short period, then drop after the strike is resolved, and nobody blames the Saudis.  In the meantime, American producers still feel the pressure of low prices and control over those prices remains in the Middle East.

This Bloomberg articles points out the very interesting fact that sometime in the end of 2016, the amount of overproduction will drop from 1.5 million barrels per day to just 200,000 barrels per day.  It’s still overproduction, though.  Until there is underproduction we won’t see prices high enough to support American producers.  There is still a stockpile of about 3 billion barrels of oil out there, after all.

This article from the Telegraph in England has a good rundown of countries and influences on oil prices.  Of greater interest is the writer’s opinion that the last OPEC meeting was meaningless, regardless of the outcome; that the supply/demand balance is already pretty precarious, and the next shortage of oil is right around the corner; and that the Saudis have lost control of OPEC, or perhaps better said, OPEC no longer exists as an effective organization.  With those premises, it makes one wonder whether the strike in Kuwait wasn’t possibly engineered at some level to make it look like the last OPEC meeting was actually effective, but then the meeting fell apart and the strike continued anyways because the reasons for striking were all there.  It’s tin-foil-hat thinking, but who knows?  Where billions of dollars are on the line all kinds of things are possible.

Southwestern Energy, in spite of posting a 1.1 billion dollar loss last year (yes, billion with a “b”) is renewing leases here in West Virginia and appears to be here for the long-term.  The article focuses on the decreasing numbers of rigs, but it mentions lease renewal and it’s a lot of fun to try to read between the lines of the executive quotes and figure out what’s actually going on.

The strike in Kuwait is over, so they’ll be bringing their full production back online.

The Trans-Alaska pipeline is back online after a fire put it out of use for a few days.  That little incident propped up oil prices for a few days.

The international price for liquefied natural gas (LNG) is dropping.  It’s the usual story, too much supply and not enough demand (WSJ: Google the headline and click the link Google provides to avoid the paywall).  Feeding the supply side is American natural gas sourced from fracking companies and liquefied at brand new plants for shipment overseas.  Pushing the demand side is Japanese electrical generation which is switching over to solar and turning back on some nuclear plants that were closed after the Fukushima disaster.  Natural gas markets are not yet global, but they’re moving that way.  It won’t be long before we’re more worried about the international benchmark for natural gas than we are the national benchmark.  For now it’s not a huge factor for West Virginia, but it’s something to keep an eye on.

Iran has discovered a shale oil field.  It’s nothing that will affect prices or supply at this time.  Iran produces oil at about $10/bbl and shale oil costs somewhere north of $40/bbl to produce, so it doesn’t make sense to develop the shale until oil prices go up significantly.  It’s there, though, and will be another source of oil in the future.

Christine Buurma with The Washington Post engages in a little speculation regarding the price of natural gas.  She’s bearish, while admitting that prices are climbing a bit.  She points to the Marcellus being such an inexpensive place to produce, as well as DUCs in the Marcellus, as well as increased efficiency on the part of drillers, as reasons why she doesn’t see gas prices increasing much in the near future.  A hot summer would go a long way toward increasing demand, which would drive prices up.  She’s not convinced, though, arguing that natural gas prices rarely reach predicted highs, and quoting an equity analyst, Mark Hanson with Morningstar in Chicago, as saying you should never underestimate the Marcellus.  She’s probably right.  It’s going to be 2017 before we see significant recovery of natural gas prices to the point where oil and gas companies start taking leases and producing at prices that return much of a royalty to our customers.

CNN Money reports that Saudi Arabia thinks that oil prices will start to rise at the beginning of 2017.  Interestingly, oil prices have been on the rise since February of this year.  They must be expecting significant increases, or perhaps a decrease in price between now and then.  The same article says the IEA (Internation Energy Agency) thinks global demand will rise slightly above global supply in the second half of this year.  Saudi Arabia, of course, will produce as much oil as people will buy from it.  Since we’re in May of 2016, the second half of the year is less than a month off.  Interesting times in the energy sector.  Interesting times.

A Royal Dutch Shell off-shore oil rig spilled about 90,000 gallons (2000 barrels) of crude and shut down.  The shut down drove oil prices up significantly during the day, but when word came down that the rig would be back online later in the day prices settled back down to about where they had started.  Oil and gas prices are so fickle.  However, the prices have been around $45/bbl and just above $2/MCF for quite a while.  We may be seeing better royalty checks and more leasing in the near future.

The fires around Fort McMurray have been heavily reported.  We only link to this article to provide some information as to how it affected oil prices.