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Oil Producers Accustomed to Price Volatility At This Point

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Three years of market downturn has caused oil producers to become accustomed to barrel price volatility, according to a new report by S&P Global Platts.

"We've just decided to embrace volatility," ConocoPhillips CEO Ryan Lance said during an industry conference this week. "We can predict prices are going to go up and then they're going to go down, but not necessarily in that order."

Oil prices are known to be cyclical, but the troughs and crescents of those cycles are getting closer and closer together, the CEO said, adding that the price “feels balanced today, but it feels tenuously balanced.”

ConocoPhillips has rethought its operations to allow the company to be profitable at a $40 barrel after the oil price crashed in 2014. Roughly a quarter of the company’s assets are in U.S. shale projects, and others are in Alaska, the North Sea and Asia Pacific. Enhancements on drilling times have hit a bottleneck, but more innovation on completions and enhanced recovery could push the industry’s average breakeven price even lower, Lance said.

According to CNBC, Conoco offloaded $16 billion worth of non-core assets last year to make itself leaner and more resilient to price shocks by improving its business margins, Lance said.

ConocoPhillips will only invest in new projects that can be profitable at an oil price of below $50 a barrel, Lance told the Financial Times late last year, adding that the company will continue to focus increasingly on U.S. shale despite skepticism about its growth potential among analysts.

Conoco believes that in addition to operational efficiencies that have been improving in the shale patch over the last few years, shale is more resilient to oil price swings than other segments of the industry. Meanwhile, everyone is watching the Middle East and Saudi Arabia in particular to fix the price crisis using the power of the Organization of Petroleum Exporting Countries and its new allies.

By Zainab Calcuttawala for Oilprice.com

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  • Mamdouh G Salameh on March 07 2018 said:
    Since the fundamentals of the global oil market are projected to remain very positive for this year and 2019 and since the market is almost rebalanced, there should hardly be any volatility with oil prices trending constantly upwards in the absence of any geopolitical developments take place.

    The reason for the current volatility is that every time oil prices show signs of heading upwards, right on cue we get announcements by the EIA or the IEA about large rises in US oil production mainly shale oil and also major build in US crude oil and gasoline inventories impacting on oil prices and forcing them to trend downwards, hence the volatility.

    It is the same game of capping oil prices between a shale ceiling and an OPEC floor of what has become known as the shale band. In 2017 the ceiling was $60/barrel and the floor was $50. In 2018, shale drillers will try to limit oil prices within a ceiling of $70 and a floor of $60 if they can.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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