NrgEdge Editor

Sharing content and articles for users
Last Updated: March 21, 2016
1 view
Business Trends
image

It is over a year now since OPEC declared its market-share cold war against shale oil producers back in 2014, yet the cartel still can't declare "mission accomplished" and claim its victory. 

 

Following its decision not to cut oil production, OPEC expected oil prices to drop to $70 a barrel, which they thought would be enough to squeeze many shale oil producers out of the market.

 

The reality proved otherwise, shale oil producers were able to react quickly in order to reduce their costs through various cost-cutting measures to weather the storm of low oil prices. And many of them managed to survive at those prices. 

 

For OPEC, that meant only one thing; oil prices have to slump further, therefore OPEC's members pursued their market-share strategy and kept pumping. 

 

In January 2015, oil prices were down at levels around $45-$55. During that time, OPEC's Secretary-General was calling the bottom in oil prices. He offered a bullish statements during his speech in London on Jan. 26 by saying "Now the prices are around $45-$55, and I think maybe they have reached the bottom and we will see some rebound very soon." 

It was not too long after that, oil prices fell further making the remark of OPEC's Secretary-General another layer of noise. Things didn't go as OPEC expected and oil prices are still falling till today to levels not OPEC nor anyone else has expected at that time.  

 

Today, oil prices are slightly above $30 a barrel down from over $100 a barrel in 2014. U.S. average rig counts is 541, down 1068 from their recent peak of 1,609 on Oct. 10, 2014. More than 40 U.S. oil and gas companies have filed for bankruptcy protection, and other companies are aggressively reducing their budgets aimed surviving the current downturn. And yet, U.S. oil production is only inching downwards. 

 

Despite falling oil prices and rig counts declines, production cutbacks are relatively minor. According to EIA, in the U.S. alone, oil production has only declined 384,000 barrel a day from its peak in July 2015 of 9,598,000 barrel a day. In general, U.S. shale oil is showing a great resilience regardless of the current bearish sentiments. 

 

A point worth mentioning here is the fact that U.S. oil production dropped to its lowest point during this downturn which was 9,096,000 barrel a day on September 2015. This can be seen as a normal reaction for the crashing prices. However, the following months production started increasing till it reached 9,227,000 barrel a day last month.

Economically, low oil prices means an inevitable decline in supply and historically, low rig count leads to declining oil production. But the current downturn has proved that this is not always the case. Something changed, and a new shift in the oil industry is taking place.

 

Technological Advancement is Beating Rig Count

 

Rig count is considered as a direct measure of the health of oil industry and oil production. Falling rig count lead to a decline in oil production, but why this is not the case in this downturn? Why shale oil producers are able to maintain production?

 

The answer to the above question lays on advanced technology introduced as well as better and efficient ways of producing the oil. Many companies are now focusing on increasing efficiency and productivity of their wells. More cheaper and efficient well intervention and well completion technology, targeting richer sections of shale plays as in the case of the Permain Region -where production is in a continous increase- as well as increasing the well productivity by using more sand in each hydraulic fracturing job. All these have offset the direct effect of falling rig count on oil production. Did OPEC expected that? Highly unlikely. 

A Short-Term Lose Better Than Out

 

Another reason that explains the resilience of shale oil is the fact that many operators who are still losing despite all the cost cutting measures prefer to take a loss and wait, because they know the oil market is boom and bust by nature and they expect things to get better soon. According to a report by Wood Mackenzie, given the cost of restarting production especially in large projects, many operators prefer to continue producing oil at a loss in hope for a rebound in prices rather than to stop production. 

 

What OPEC's Members didn't Expect

 

It seems now that when the OPEC's members decided not to cut their oil output back in 2014, they didn't really expect the current resilience of U.S. shale oil. They didn’t expect the resilience of U.S. oil production despite the dramatic fall in rig count. 

 

They didn’t expect that technology will be able to offset the effect of low oil prices and rig count on oil production. And most of all, they didn't expect the oil prices to fall to its current levels. And this is not something new, they are not accurate at foreseeing the outcomes of their actions, if they were, they would have known that high oil prices will lead to the current shale oil boom in the first place.

3
2 0

Something interesting to share?
Join NrgEdge and create your own NrgBuzz today

Latest NrgBuzz

North American crude oil prices are closely, but not perfectly, connected

selected North American crude oil prices

Source: U.S. Energy Information Administration, based on Bloomberg L.P. data
Note: All prices except West Texas Intermediate (Cushing) are spot prices.

The New York Mercantile Exchange (NYMEX) front-month futures contract for West Texas Intermediate (WTI), the most heavily used crude oil price benchmark in North America, saw its largest and swiftest decline ever on April 20, 2020, dropping as low as -$40.32 per barrel (b) during intraday trading before closing at -$37.63/b. Prices have since recovered, and even though the market event proved short-lived, the incident is useful for highlighting the interconnectedness of the wider North American crude oil market.

Changes in the NYMEX WTI price can affect other price markers across North America because of physical market linkages such as pipelines—as with the WTI Midland price—or because a specific price is based on a formula—as with the Maya crude oil price. This interconnectedness led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook. However, the usefulness of the NYMEX WTI to crude oil market participants as a reference price is limited by several factors.

pricing locations of selected North American crudes

Source: U.S. Energy Information Administration

First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Similarly, while the price of the Bakken Guernsey marker declined to -$38.63/b, the price of Louisiana Light Sweet—a chemically comparable crude oil—decreased to $13.37/b.

Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges.

Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract provides. Consequently, these market participants will instead turn to shorter-term spot price alternatives.

Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area.

Principal contributor: Jesse Barnett

May, 28 2020
Financial Review: 2019

Key findings

  • Brent crude oil daily average prices were $64.16 per barrel in 2019—11% lower than 2018 levels
  • The 102 companies analyzed in this study increased their combined liquids and natural gas production 2% from 2018 to 2019
  • Proved reserves additions in 2019 were about the same as the 2010–18 annual average
  • Finding plus lifting costs increased 13% from 2018 to 2019
  • Occidental Petroleum’s acquisition of Anadarko Petroleum contributed to the largest reserve acquisition costs incurred for the group of companies since 2016
  • Refiners’ earnings per barrel declined slightly from 2018 to 2019

See entire annual review

May, 26 2020
From Certain Doom To Cautious Optimism

A month ago, the world witnessed something never thought possible – negative oil prices. A perfect storm of events – the Covid-19 lockdowns, the resulting effect on demand, an ongoing oil supply glut, a worrying shortage of storage space and (crucially) the expiry of the NYMEX WTI benchmark contract for May, resulted in US crude oil prices falling as low as -US$37/b. Dragging other North American crude markers like Louisiana Light and Western Canadian Select along with it, the unique situation meant that crude sellers were paying buyers to take the crude off their hands before the May contract expired, or risk being stuck with crude and nowhere to store it. This was seen as an emblem of the dire circumstances the oil industry was in, and although prices did recover to a more normal US$10-15/b level after the benchmark contract switched over to June, there was immense worry that the situation would repeat itself.

Thankfully, it has not.

On May 19, trade in the NYMEX WTI contract for June delivery was retired and ticked over into a new benchmark for July delivery. Instead of a repeat of the meltdown, the WTI contract rose by US$1.53 to reach US$33.49/b, closing the gap with Brent that traded at US$35.75b. In the space of a month, US crude prices essentially swung up by US$70/b. What happened?

The first reason is that the market has learnt its lesson. The meltdown in April came because of an overleveraged market tempted by low crude oil prices in hope of selling those cargoes on later at a profit. That sort of strategic trading works fine in a normal situation, but against an abnormal situation of rapidly-shrinking storage space saw contract holders hold out until the last minute then frantically dumping their contracts to avoid having to take physical delivery. Bruised by this – and probably embarrassed as well – it seems the market has taken precautions to avoid a recurrence. Settling contracts early was one mechanism. Funds and institutions have also reduced their positions, diminishing the amount of contracts that need to be settled. The structural bottleneck that precipitated the crash was largely eliminated.

The second is that the US oil complex has adjusted itself quickly. Some 2 mmb/d of crude production has been (temporarily) idled, reducing supply. The gradual removal of lockdowns in some US states, despite medical advisories, has also recovered some demand. This week, crude draws in Cushing, Oklahoma rose for the second consecutive week, reaching a record figure of 5.6 million barrels. That increase in demand and the parallel easing of constrained storage space meant that last month’s panic was not repeated. The situation is also similar worldwide. With China now almost at full capacity again and lockdowns gradually removed in other parts of the world, the global crude marker Brent also rose to a 2-month high. The new OPEC+ supply deal seems to be working, especially with Saudi Arabia making an additional voluntary cut of 1 mmb/d. The oil world is now moving rapidly towards a new normal.

How long will this last? Assuming that the Covid-19 pandemic is contained by Q3 2020, then oil prices could conceivably return to their previous support level of US$50/b. That is a big assumption, however. The Covid-19 situation is still fragile, with major risks of additional waves. In China and South Korea, where the pandemic had largely been contained, recent detection of isolated new clusters prompted strict localised lockdowns. There is also worry that the US is jumping the gun in easing restrictions. In Russia and Brazil – countries where the advice to enforce strict lockdowns was ignored as early warning signs crept in – the number of cases and deaths is still rising rapidly. Brazil is a particular worry, as President Jair Bolosnaro is a Covid-19 skeptic and is still encouraging normal behaviour in spite of the accelerating health crisis there. On the flip side, crude output may not respond to the increase in demand as easily, as many clusters of Covid-19 outbreaks have been detected in key crude producing facilities worldwide. Despite this, some US shale producers have already restarted their rigs, spurred on by a need to service their high levels of debt. US pipeline giant Energy Transfer LP has already reported that many drillers in the Permian have resumed production, citing prices in the high-US$20/b level as sufficient to cover its costs.

The recovery is ongoing. But what is likely to happen is an erratic recovery, with intermittent bouts of mini-booms and mini-busts. Consultancy IHS Markit Energy Advisory envisions a choppy recovery with ‘stop-and-go rallies’ over 2020 – particularly in the winter flu season – heading towards a normalisation only in 2021. It predicts that the market will only recover to pre-Covid 19 levels in the second half of 2021, and a smooth path towards that only after a vaccine is developed and made available, which will be late 2020 at the earliest. The oil market has moved from certain doom to cautious optimism in the space of a month. But it will take far longer for the entire industry to regain its verve without any caveats.

Market Outlook:

  • Crude price trading range: Brent – US$33-37/b, WTI – US$30-33/b
  • Demand recovery has underpinned a rally in oil prices, on hopes that the worst of the demand destruction is over
  • Chinese oil demand is back to the 13 mmb/d level, almost on par year-on-year
  • News that development of potential Covid-19 vaccines are reaching testing phase also cheered the market
  • The US active oil and gas rig count lost another 35 rigs to 339, down 648 sites y-o-y

---------------####---------------

In this time of COVID-19, we have had to relook at the way we approach workplace learning. We understand that businesses can’t afford to push the pause button on capability building, as employee safety comes in first and mistakes can be very costly. That’s why we have put together a series of Virtual Instructor Led Training or VILT to ensure that there is no disruption to your workplace learning and progression.

Find courses available for Virtual Instructor Led Training through latest video conferencing technology.

May, 23 2020