The world’s oil industry has been beat up by bottom-hugging prices and less-than robust demand for so long that industry-related bad news – albeit TEMPORARY – has caused many players to sing “happy days are here again.”
Realists that look at the current supply and demand situation, have a slightly different take on both West Teas Intermediate and Brent crudes hugging the $50 a barrel (Bbl) hurdle.
No basis for $50 crude
There is no fundamentals basis for $50 crude today — the imbalance [supply and demand] globally is too large,” Porter Bennett, CEO of advisory/analytics firm Ponderosa Advisors, told Kallanish Energy.
Since April 4, the last low point for both WTI and crude, prices have jumped 38.6% and 31%, respectively. WTI moved from $35.70/Bbl, to $49.48/Bbl on May 27, and Brent rising from $37.69/Bbl, to $49.38/Bbl, according to data from macrotrends.net.
Within that roughly two-month period, supply disruptions due to militant uprisings have cut 800,000 BPD of crude production from Nigeria’s 2.2 MMBPD in production, there were potential cutbacks to investment in Iraq, escalating civil unrest in rapidly collapsing Venezuela, and as much as 1 million barrels per day (MMBPD) of Canadian production was shut-in due to wild fires.
Consider scale, longevity
Couple all the above with the roughly 800,000 BPD cutback from U.S. producers due to mediocre demand and those pesky low prices, and it would seem the market is looking up.
“It’s important to consider the scale and longevity of these events,” BTU Analytics Senior Energy Analyst Erika Coombs wrote in a recent blog. “While both Nigeria and Venezuela have the potential to be longer-term events [could last for 6+ months], the magnitude of production that has been impacted between March and April, according to the International Energy Agency, is 160,000 BPD.”
Coombs wrote the declines are easily offset by almost 200,000 BPD of gains in Iraq, 300,000 BPD f gains in Iran, and an additional 100,000 BPD of increased production in the United Arab Emirates.
Should $50 crude stick, Coombs told Kallanish Energy she believes producers like Pioneer Natural Resources and Whiting Petroleum, which have previously talked about bringing on more wells or restarting drilling programs, could pull the proverbial trigger.
“At $50 it’s not so much about ramping up, it’s more about actually being cash flow neutral and not bleeding as much,” Coombs told Kallanish Energy.
Hedge new production
“At $50 crude, a number of producers in each of the major basins will be motivated to hedge out new production,” David R. Braziel, consulting/analytics firm RBN Energy’s managing director, Finance and Fundamental Analysis, told Kallanish Energy.
“This could be by completing their DUCs [drilled, but uncompleted wells] or drilling new wells. The real unknown is which producers will have trouble responding quickly either due to reduced headcount or capital constraints.”
Ponderosa’s Bennett told Kallanish Energy he believes barring any other major events, like the Canadian wildfires, the militant’s actions in Nigeria, prices will be back in the low 40s/high 30s/Bbl.
Bennett sees no unknown and thus unpredicted structural/black swan event that somehow adds 1.5 MMBPD of demand, or cuts 1.5 MMBPD of total supply.
“From $50 today, we think prices will fall, ending the year about $46 or so,” according to Bennett. “We think next year they will be in the low $50s, maybe end the year at $55.”
Bennett did offer a bit of bright light, saying if prices look like they will stay above $50, some U.S. producers will increase their drilling activity, with DUCS likely essentially used up by end of 2016.