April 23, 2015

Oil-Gas Prices and Prominent U.S. Figures

Oil price has been plummeting sharply over the past several months, but it is still much more higher than the gas price (around three times of it) in U.S. (Figure-1). This is an important factor of the production companies’ preference between oil and gas wells. Even though oil price/gas price ratio has decreased from 10 to 3, production companies continue to prefer oil wells instead of gas wells.

Figure-1

The number of U.S. oil rigs has decreased during the last few weeks. However, it is still pretty higher than the pre-2010 oil rig-counts while the number of gas wells is creeping (Figure-2).

Figure-2

Gas price has been very low during the past years. What has been changed so far? Why have the drilling activities declined sharply? What’s the reason of the oil companies’ limited and lagged reaction to the low oil prices?

1-      There was an important alternative (gas market) with huge expectations (export opportunities, new technology-especially for transportation sector, high price forecast) between 2000-2010 for the production companies.

2-      Gas to liquid margin had been promising between 2010-2014 and gas producers had survived by the high margin during that period of time. Addition to decrease of the gas price, lower margin of the GTL opportunity is an important factor of this significant drop in the number of gas drillings recently.

3-      There isn't any easy market or an alternative way for the production companies today. This is the main reason of the oil companies’ slight reaction to the low oil prices in U.S.

High oil price was necessary for the directional and horizontal wells (Figure-3). Can the production companies survive with high costs and low prices? No.

Figure-3

Oil prices may increase as predicted by the most of the authorities. The number of rigs may be one of the main driving force of the upturn. On the other hand, China’s petroleum consumption demand slowed in past two years. It is estimated to decline to 2 percent between 2015 and 2020 per year and 1 percent between 2020 and 2030. This kind of demand reactions could balance the decrease of the drilling activities and push oil prices lower. Iran nuke deal is another important expectation for the prices. According to the Energy Information Administration (EIA), oil prices could tumble $15 a barrel next year if sanctions are lifted following a final nuclear deal with Iran. 

Tomorrow's oil price is a big unknown. EIA’s guesses range from $52 to $252 for Brent crude oil and $3.12 to $10.63 for Henry Hub. (Figure-4 and 5) 

                                                       Figure-4 and Figure-5 (Ref: EIA)

On the other hand, EIA's significant change on the oil price projections (Figure-6) once again showed us that; oil price prediction is challenging. 

 

                                                                     Figure-6 (Ref: EIA)

Investment banks see the price of Nymex-traded crude-oil futures in the range from $55 to $95 in 2016 following a steady increase during 2015. (Figure-7)

 Figure-7 (Ref: The Wall Street Journal) 

What if the predictions of oil prices are wrong? At that scenario, there is a big opportunity for the renewable technology. Low oil price may lead the investments to the other type of energy sources. Of course, some stubborn companies will endure to look for the easy and cheap oil in and out of the U.S. Obviously low oil price is also an important driver of merger and acquisition activity. 

Lastly, what’s the effect of the low oil prices to the U.S. economy? Strong dollar and low oil price may lead to better economy from the U.S. deficit side (Figure-8).

Figure-8

What about the production figures? (Figure-9) It's difficult to fill the consumption gap with the domestic production if the prices remain at these ranges. In a nutshell, lower oil price is a double-edged sword for the U.S. economy.  

Figure-9