Your account already exists. Please login first to continue managing your settings.
Pundits have started to worry about supply shortages. This is not necessarily a bad thing.
What a difference a day makes.
Last Thursday, gloom and doom prevailed. Most of the news stories that were transmitted were more of the same gnashing of teeth that we’ve been hearing since September:
• BJ Services and Pride International were cutting jobs;
• The president of BP Americas told the assemblage at Howard Weill annual convention in New Orleans that the recent price collapse presents “serious challenges.” “Our cost structure has to be fitted more closely to the volatile energy price environment we accepted as normal before 2004,” Lamar McKay told the audience.
• Despite earlier suggestions that Big Oil might be on a shopping spree, Reuters reported that executives who could be in the position to strike deals with, say, a major independent were “not in the market.” Low share prices, frozen credit markets, and the US’s vast gas reserves locked in shale plays were some of the reasons for the lack of interest in future acquisitions.
• Finally, the Obama administration has, in the US, revived a tax battle that the industry “fought and won” last year, according to the Wall Street Journal. The president’s budget proposal plans to eliminate the industry’s tax breaks to raise more than US $31 billion in the next 10 years, resulting in an ad campaign by the American Petroleum Institute claiming that new taxes “would hobble our ailing economy” and “cost thousands of American jobs.”
So what’s the good news? Recently several articles have appeared that suggest that the supply/demand balance still works. Another WSJ article suggests that the slowdown in investment in oil and gas production “could lop off nearly 8 MMbo/d of future supply growth,” meaning that another price surge could be imminent. The information comes from a recent report by Cambridge Energy Research Associates (CERA).
The CERA report goes on to say that 7.6 MMbo/d are at risk due to project deferrals or cancellations. This is more than half of the production increase CERA projected between the summer of 2008 and the year 2014.
The New York Times also chimed in, stating that investors “are laying the groundwork for another bull run on the energy and commodities markets, in spite of signs
suggesting the overall economy is still deteriorating.”
While oil prices declined fairly sharply March 27, they posted gains throughout the previous week and were still above $50/bbl. And while demand in the US and China was still low, market watchers are looking to OPEC with renewed hope. OPEC members have managed to stick to production cuts and curtail production faster than demand has dropped. “The cartel, which controls roughly 40% of global oil production, has cut output by about 8.5% over the same period last year, while global demand is down by a little over 2%, according to the US Energy Information Administration,” the article states.
If economies start growing again in early 2010 as some analysts suggest, supply won’t be able to keep up with demand. Furthermore, they don’t expect OPEC to boost production quotas until oil reaches $70 to $75/bbl.
So what do oil companies do in the meantime? Some, like Integrity Natural Resources LP, are taking advantage of the decrease in service and supply costs. In a press release issued March 27, the company stated that it expects prices to be in the $80 to $90/bbl range by the end of this year. Meanwhile, it is using “this temporary lull” to contract drilling and completion services while service costs are low. It is also using the current pricing environment “to drill wells that can last well over 20 years.
“It would make no sense to slow down drilling for a short-term drop in prices,” the company stated