Bears Burst Bakken Bubble

Ongoing concerns of the Spanish debt crisis dragged on international markets Monday. Oil prices, meanwhile, had rallied last week amid tensions in the Persian Gulf. By Monday, however, Iran had softened its stance on oil transit lanes through the Strait of Hormuz. U.S. crude oil for September delivery, meanwhile, was down more than $2 to end Monday at $89.23. Analysts in the United States expressed concern that, if U.S. crude oil prices continue to fall, development of shale oil fields in North Dakota could slow down.

Critics of U.S. President Barack Obama last week passed legislation through the House of Representatives that calls for an expanded offshore lease plan that goes well beyond what the White House envisions for the next five years. The American Petroleum Institute, meanwhile, said oil well completions in the United States increased by 13 percent during the second quarter compared with the previous year.

"The oil and natural gas industry expanded oil drilling in the second quarter of 2012 thanks in large part to access on private and state lands," said Hazem Arafa, director of API's statistics department, in a recent statement.

This supports Obama administration statements that domestic oil production is at a historic high. The White House reopened the Gulf of Mexico to drilling activity and, in Norway, the U.S. interior secretary said the arctic waters off the coast of Alaska may soon experience a similar rush. But it’s the Bakken crude oil deposit in the Northern Plains that is experiencing the most significant boom.

Authorities in North Dakota said drillers hit pay dirt in the Bakken formation with nearly every attempt. Production there averages around 800,000 barrels per day, according to some estimates. New advances in technology used to exploit hydrocarbons trapped in shale deposits like the Bakken formation, however, makes those wells more expensive than in conventional plays. It costs roughly $10 million per well to tap into the Bakken formation, suggesting that a weakened U.S. economy and declining crude oil values could suppress the amount of money drillers have to spend on shale plays.

This week, the Obama administration said more than 20 million acres in the western Gulf of Mexico would go on the auction block in November.  The Bureau of Ocean Energy Management estimates the proposed lease sale could lead to the production of as much as 200 million barrels of oil and 938 billion cubic feet of natural gas. Downgrades in the credit rating for major European economies by Moody's Investors Service and sluggish growth in the U.S. economy, meanwhile, is keeping oil prices down. Analysts last week warned that a continued slump in the U.S. benchmark for crude oil could drag on the boom under way in oil fields in North Dakota. Despite pressure from critics of domestic energy policy, the offshore oil sector is moving along at a historic clip. If bullish sentiments about the state of the global economy continue to wane, however, it’s the bears that may ultimately burst the North Dakota oil bubble.

By. Daniel Graeber of Oilprice.com

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