Volatile situation
The downturn in oil prices continues to be painful to U.S. producers, and economic recovery is expected to be gradual during 2016 into 2017. But that situation could change quickly.
Oil prices have bounced from multiyear lows, but the industry continues to suffer.
Oil-field companies and those that service them have struggled over the past nearly two years as low prices have led to slashed budgets, sharp revenue drops and layoffs. The downturn is likely to continue, according to a survey released last week by Fort Collins, Colo. based Citadel Advisory Group.
The March survey of more than 500 privately held U.S. energy companies found that 92 percent of respondents have reduced their workforce over the past two years, including 41 percent that have laid off more than 30 percent of their staff. Sixty-nine percent of respondents said they expect additional cuts over the next three months.
Despite gains over the past month, almost 76 percent of the survey respondents said the oil price is likely to be at or less than $40 a barrel on June 30. Domestic benchmark West Texas Intermediate crude briefly topped $40 a barrel last month before retreating. The price slipped 49 cents Thursday to close at $37.26 a barrel.
Oil price projections vary widely, but the consensus seems to be that prices gradually will recover throughout 2016 and into 2017. Record domestic oil storage levels and wells that have been drilled but not completed likely will keep the price from climbing quickly as companies are expected to release oil when prices increase.
But much of the reason oil prices are so difficult to predict is because they are affected by so many factors.
World is ‘powder keg’
While global oil companies still are producing at a surplus, Citigroup researcher Ed Morris said last week the situation could change quickly.
“This is a world that’s a powder keg,” Morris, Citigroup’s global head of commodities research, said at the University of Oklahoma Energy Symposium. “We ought not be completely thinking that $50 is a cap. We’ve seen the price go from $26 to $40 based on very small interruptions.”
Morris credited the price jump over the past month to a series of small events, including pipeline explosions in Turkey, Nigeria and Colombia.
“Disruption may not be just a future risk,” he said. “It may be an impending risk, as well.”
Improved technology and processes over the past few years have allowed domestic producers to drill wells at far lower costs than when the shale oil and natural gas revolution began less than a decade ago. While no domestic oil producer is profitable at $30, companies are working to lower costs to the point that they can make money at $50 oil, said Mark Mills, president of Washington-based Digital Power Group.
“$50 is the new $100,” he said at the OU symposium. “We’re not there yet, but that’s where we’re going. That’s deeply disruptive for everyone not in the United States.”
While domestic producers have lowered their costs, such changes are not possible in other parts of the world, including much of the Middle East, said Joshua Landis, director of the Center for Middle Eastern Studies at OU.
Drilling costs are relatively low throughout much of the Middle East, but Saudi Arabia and other countries in the region use oil money to pay for social services and other government expenses. Saudia Arabia needs $95 oil to balance its budget, and other countries in the region need an oil price between $60 and $90, Landis said.
“Saudi Arabia is never going to be able to get $100 oil again. That is going to shake up Saudi Arabia and the (Persian) Gulf,” he said. “There’s going to be extraordinary belttightening in the Gulf. But they have a lot of credit and can borrow.”