In my last column, I pointed out the lockstep insanity being followed by US oil companies in increasing production, no matter whether or not the end product was profitable in today’s depressed oil market. Happily, I was also seeing an end to that destructive strategy, with several independent E+P’s guiding lower on production and cutting capex yet again.
I won’t replay last week’s column in its entirety. But now that oil is showing real signs of being ready to break out of its 2017 range, what oil companies do now will really matter for our investments. Will they turn open the spigot again at the first sign of recovering prices? Or have they been cowed enough (or just plain out of leveraging options) and will stop trying to forecast oil prices and just let the market dictate their plans?
There are signs that the oil companies will be more conservative if oil does reach $60 or even $70 later this year. This story outlines the plummeting use of sand, a major input cost for frackers. This is important particularly because ever more efficient drilling technologies, which maximize acreage and initial volumes of oil from fracked wells, all rely on ever larger volumes of sand.
The sudden drop in sand orders could mean that oil companies are taking a real break on breakneck drilling. Or, it could mean that they’re just fed up with rising sand costs. Or, it’s possible they are experimenting with other (cheaper?) compounds.