• 3 hours India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 8 hours Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 12 hours Russia, Saudis Team Up To Boost Fracking Tech
  • 18 hours Conflicting News Spurs Doubt On Aramco IPO
  • 19 hours Exxon Starts Production At New Refinery In Texas
  • 20 hours Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 2 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 2 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 2 days China To Take 5% Of Rosneft’s Output In New Deal
  • 2 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 2 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 2 days VW Fails To Secure Critical Commodity For EVs
  • 2 days Enbridge Pipeline Expansion Finally Approved
  • 2 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 2 days OPEC Oil Deal Compliance Falls To 86%
  • 2 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 3 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 3 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 3 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 3 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 3 days Aramco Says No Plans To Shelve IPO
  • 5 days Trump Passes Iran Nuclear Deal Back to Congress
  • 5 days Texas Shutters More Coal-Fired Plants
  • 6 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 6 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 6 days Chevron Quits Australian Deepwater Oil Exploration
  • 6 days Europe Braces For End Of Iran Nuclear Deal
  • 6 days Renewable Energy Startup Powering Native American Protest Camp
  • 6 days Husky Energy Set To Restart Pipeline
  • 7 days Russia, Morocco Sign String Of Energy And Military Deals
  • 7 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 7 days China Set To Continue Crude Oil Buying Spree, IEA Says
  • 7 days India Needs Help To Boost Oil Production
  • 7 days Shell Buys One Of Europe’s Largest EV Charging Networks
  • 7 days Oil Throwback: BP Is Bringing Back The Amoco Brand
  • 7 days Libyan Oil Output Covers 25% Of 2017 Budget Needs
  • 7 days District Judge Rules Dakota Access Can Continue Operating
  • 8 days Surprise Oil Inventory Build Shocks Markets
  • 8 days France’s Biggest Listed Bank To Stop Funding Shale, Oil Sands Projects
  • 8 days Syria’s Kurds Aim To Control Oil-Rich Areas
Alt Text

Mass EV Adoption Could Lead To $10 Oil

As the adoption of electric…

Alt Text

OPEC Favors 9-Month Extension Of Production Cut Agreement

According to Reuters sources, OPEC…

Has The E&P Industry Lost Touch With Reality?

Has The E&P Industry Lost Touch With Reality?

The U.S. rig count increased by 19 this week as oil prices dropped below $48 per barrel–the latest sign that the E&P industry is out of touch with reality.

Getty Images from The New York Times (July 26, 2015)

The last time the rig count increased this much was the week ending August 8, 2014 when WTI was $98 and Brent was $103 per barrel.

What are they thinking?

In fairness, the contracts to add more rigs were probably signed in May and June when WTI prices were around $60 per barrel (Figure 1) and some felt that a bottom had been found, left behind in January through March, and that prices would continue to increase. Related: Oil Price Rout Set To Inflict Real Pain On Russia

Figure 1. Daily WTI crude oil prices, January 2-July 24, 2015. Source: EIA and NYMEX futures prices (July 21-24).

(click image to enlarge)

Even then, however, the fundamentals of supply, demand and inventories pointed toward lower prices–and still, companies decided to add rigs.

In mid-May, I wrote in a post called “Oil Prices Will Fall: A Lesson in Gravity”,
“The data so far says that the problem that moved prices to almost $40 per barrel in January has only gotten worse. That means that recent gains may vanish and old lows might be replaced by lower lows.”

In mid-June, I wrote in a post called “For Oil Price, Bad Is The New Good”,
“Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.”

Oil prices began falling in early July and fell another 6% last week. Some of that was because of the Iran nuclear deal, the Greek debt crisis and the drop in Chinese stock markets. But everyone knew that the first two were coming, and there were plenty of warnings about the Chinese stock exchanges long before July.

The likelihood of lower oil prices should not have been a surprise to anyone.

Of the 19 rigs added this week, 12 were for horizontal wells (Figure 2) and 7 of those were in the Bakken, Eagle Ford and Permian plays that account for most of the tight oil production in the U.S. Related: 9 Reasons Why We Should Be More Worried About Low Oil Prices

Figure 2. Rig count change table for horizontal wells. Source: Baker-Hughes and Labyrinth Consulting Services, Inc.

Horizontal shale gas plays added 8 rigs. That is as out-of-touch as the tight oil rig additions since gas prices averaged only $2.75 in the second quarter of 2015 (Figure 3) and are almost half of what they were in the first quarter of 2014.

Figure 3. Henry Hub natural gas daily prices and quarterly average prices. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

The U.S. E&P industry is really good at spending other people’s money to increase production. It doesn’t matter if there is a market for the oil and gas. As long as the capital keeps flowing, they will do what they do best. Related: Saudis Expand Price War Downstream

Don’t be distracted by the noisy chatter about savings through efficiency or re-fracking. Just look at the income statements and balance sheets from first quarter and it’s pretty clear that most companies are hemorrhaging cash at these prices. Second quarter is likely to be worse and it gets uglier when credit is re-determined in Q3, hedges expire, and reserves are written down after Q4.

This is an industry in crisis despite the talk about showing OPEC a thing or two about American ingenuity. Increasing drilling when you’re losing money and prices are falling doesn’t sound very ingenious to anyone.

Watch for the markets to agree as oil prices fall lower in coming weeks.

By Art Berman for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News