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Page added on July 20, 2016
Oil Prices Might Not Rebound Until 2019
It’s a safe bet that investors are getting increasingly tired of all the conflicting forecasts about oil and gas prices. Some argue that oil is heading back to $20 thanks to the continuing excess supply. Others claim that the excess is overestimated and crude is well on its way to reach $80 or more by the end of the year. The likely truth, as usual, is somewhere in the middle, at least for the time being.
But according to energy consultants Douglas-Westwood, prices will remain where they are now until about 2019, when offshore oil production will finally peak. The company’s analysts list 15 large-scale offshore projects that are to blame, including Iran’s South Pars field, Brazil’s Lula in the pre-salt layer of the Santos Basin, and Mexico’s Tsimin-Xux. These three alone are projected to yield a combined 1.617 million barrels per day in 2017.
To put this in perspective, global crude oil consumption next year is seen by the EIA to rise by 1.5 million bpd, to 96.78 million bpd, versus estimated total production of 96.79 million bpd.
Gas production is set for accelerated growth as well, thanks to projects such as Gorgon and Wheatstone off the Australian coast as well as supply expansion in the Middle East, most notably in Iran and Qatar, and a host of LNG projects springing up in the U.S and elsewhere. LNG in particular could lead to a prolonged price depression for the commodity, as virtually every country that has any gas reserves will be pushing for a piece of the pie.
At the same time, however, Douglas-Westwood analysts note that a lot of offshore projects have been canceled. It’s just that the effects of these cancellations on overall production will not be felt before 2019. After that, E&Ps will have another problem to deal with: ramping up falling production after axing more than 350,000 jobs and cutting investments to the core.
Add to this the production equipment that’s been idled for years, and the oil and gas industry may well be facing another crisis.
There seems to be no way out of this vicious circle. E&Ps are currently prioritizing dividends and cash flow, which means they cannot afford to shelve too many projects, especially since they had already invested so much in them prior to the price downturn. As of March this year, Big Oil had already cancelled as much as $270 billion in projects, data from Rystad Energy shows.
What’s more, E&Ps need their offshore existing projects for two reasons: reserve replacement rates and new offshore drilling regulations. Thanks to the price downturn, the ratio of reserve replacement for the world’s biggest oil companies has fallen to multi-year lows. In fact, new oil discoveries last year were the lowest since 1952. This is a potentially big problem because oil and gas are, after all, non-renewable energy sources.
New regulations from the U.S. government, on the other hand, have made new offshore exploration more expensive. The new regulations, first released in April and supplemented recently with a set of specific rules concerning Arctic drilling, aim to reduce the environmental risks associated with offshore hydrocarbon exploration.
So, oil and gas producers are facing higher production costs for offshore drilling as well as a workforce shortage in a few years. In such a situation, their only reasonable course of action is getting the most out of what they have. The prolonged glut is an unavoidable side effect of this course of action.
21 Comments on "Oil Prices Might Not Rebound Until 2019"
Ralph on Wed, 20th Jul 2016 10:21 am
Seneca cliff, sometime in the next decade.
rockman on Wed, 20th Jul 2016 11:03 am
Oil prices have already rebounded from less then $30 to $45…a 50% increase. And at $45/bbl it’s about 12% above the historic average adjusted for inflation When oil was at the current price in 2004 we had about 1,200 rotary rigs drilling…almost 3X the current count.
Folks can think about that dynamic for a bit.
Danlxyz on Wed, 20th Jul 2016 12:39 pm
The EIA has an article comparing the operating cash flow to Capex for 39 onshore US oil companies from 2012 to 1Q2016.
http://www.eia.gov/todayinenergy/detail.cfm?id=27112#
There is still a $5 Billion annual shortage but things are looking up. With the price increases in 2Q2016 they may actually beak even or start to repay their debt.
Of course every company is different. Some may have cash available to pick up some assets at a good price. Oil field investors have to be optimists or a bit crazy to even be in the business.
Sissyfuss on Wed, 20th Jul 2016 1:26 pm
I’m sure Nasdick is reporting from an unbiased and honest perspective, not wanting to mislead prospective investors who then might make incorrect decisions with their monies. Don’t cha tink?
Boat on Wed, 20th Jul 2016 8:27 pm
Sissyfuss,
So let’s hear your unbiased well researched opinion. We will all be interested.
GregT on Thu, 21st Jul 2016 12:19 am
You’re going to lose your shirt Boat, as well as your bank owned shared accommodations.
As the age old adage goes, “A fool and his money will soon be parted”.
You Kevin, make foolish people everywhere look like an Albert Einstein.
Kenz300 on Thu, 21st Jul 2016 8:36 am
Are banks still loaning money to fossil fuels companies………..
Seems like the bad loans are still piling up……..
Bankruptcies in the oil patch continue………..
shortonoil on Thu, 21st Jul 2016 10:00 am
The price of oil is now at a level that it was at in late 2004 according to EIA data. That is, the price of oil has retrenched to a 15 year low, and stayed there for almost two years. If we look at the 55 year history of the price, and compare the present situation to it, we find that the price has now fallen by more than six standard deviations from its 55 year mean. Or, if it is assumed that the price structure has not changed, there is over a one in a million chance that this could have occurred randomly.
The odds are (better than a million to one) that the entire price structure has gone through a transition phase. Past price history can no longer be reliably used to predict future price activity. That the price will increase again, because it historically always has, is no longer a valid assumption. With past history nullified, as an indicator, the statistical probably of a price recovery can now be no more than 50-50.
This means that the risk of investing into the industry has increased by 100% if an assumed eventual price increase was priced into the original analysis. Return on investment would then also need to increase by 100% to become economically attractive.
There are probably very, very few projects now being undertaken that could satisfy the needed criteria to justify being taken to completion. That is because it has been generally “assumed” that a price recovery would eventually occur! Statistically that has become an exceedingly dangerous position to take.
http://www.thehillsgroup.org/
Sissyfuss on Thu, 21st Jul 2016 10:26 am
Thanks for that ringing endorsement, Greg. Calling this fool an Einstein is gratifying to the least. And Bloat, while I am fairly new at POD,”my background is in environmental sciences”, I look and listen for the ring of truth in ones’ statements which resonates in the commentary of Short, Davy, Gregt, Onlooker, and others. The only ring I get from you is a wrong number.
Davy on Thu, 21st Jul 2016 10:39 am
“History can no longer be relied upon to predict future”. Short, that is a profound statement and it can be applied to other areas. We are in a new existential paradigm. We must be very cautious about using the past as a blueprint for the future here on out. We are still in the status quo but only barely.
marmico on Thu, 21st Jul 2016 10:46 am
The nominal price of oil (WTI spot) fell ~46% from 1985 to 1986. It fell 48% from 2014 to 2015.
Your alleged 6 sigma (1.38 million to 1 odds)event has happened twice in 30 years.
shortonoil on Thu, 21st Jul 2016 11:18 am
“The only ring I get from you is a wrong number. “
Well, for that one you get 3 PO News stars to paste into your scrap book. We’ll also take up a collection, and send you a stuffed Teddy Bear for you birthday.
When’s your birthday?
shortonoil on Thu, 21st Jul 2016 11:28 am
“Seneca cliff, sometime in the next decade.”
That’s right. The next three years are included in the next decade.
http://www.thehillsgroup.org/depletion2_022.htm
shortonoil on Thu, 21st Jul 2016 11:30 am
All most forgot:
http://www.zerohedge.com/news/2016-07-21/why-another-oil-price-downturn-distinct-possibility
Ars on Thu, 21st Jul 2016 11:34 am
It’s a bumpy plateau, like everybody knew it was going to be. Too much stressing over mundane matters. Some people ain’t got nothin impotent to do!
rockman on Thu, 21st Jul 2016 11:51 am
Davy – “History can no longer be relied upon to predict future”. But when has it ever? The most obvious reason IMHO besides factors are never exactly the same: there will be a different set of actors calling the shots. I always think of Hitler’s ego: had he not been so obsessed with himself he would not have gone after Russia until he had dominated Europe and England. Similarly to declaring war in the US after the Pear Harbor attach.
Had a leader with a more modest temperament been in charge we all might be speaking German today. LOL.
Davy on Thu, 21st Jul 2016 1:35 pm
Rock, that is not my meaning. I feel we are on the cusp of change to a new fundamental direction for human kind. In this respect the way life unfolds will differ markedly from earlier times which were characterized by growth and development.
Sissyfuss on Thu, 21st Jul 2016 1:46 pm
My birthday is the ides of December, Short. And I’d rather have a Trump effigy doll to stick pins in when I’m bored.
Sissyfuss on Thu, 21st Jul 2016 1:49 pm
Ars, I’ve got plenty of impotent things to do. Just ask my girlfriend!
stacy jo mcll on Thu, 21st Jul 2016 2:10 pm
I’m new to this chat. I hope oil goes to $200 a barrel soon so we stop using it and develop alternative energy. We need to stop driving less and causing less global warming.
shortonoil on Thu, 21st Jul 2016 2:15 pm
“I feel we are on the cusp of change to a new fundamental direction for human kind. “
There can be no doubt about it; for one thing we are on the cusp of the oil age. This will be the most dramatic event to have happened since the fall of the Western Roman Empire. What ever other world shaking events accompanying it is difficult to project, but there is no shortage of candidates.
While on the subject of oil, we stated several years ago that past the 2012 energy half way point that the world would never again be able to consume all of the petroleum produced. The reason is simple; even though there is a huge resource of hydrocarbons, little of what remains can power the economic activity required to use it. Its called depletion!
The oil age will end when producers can no longer make money producing oil, and that time has arrived.
http://www.zerohedge.com/news/2016-07-21/china-floods-world-gasoline-european-stocks-hit-all-time-high
Inventories continue to pile up all along the petroleum supply chain. Prices will continue to move downward. We can be no more than 2 or 3 years from a world wide crisis for the industry; an event which will dominate every economy in the world.
Let’s just hope that we can recognize the situation for what it is. The natural depletion of an essential commodity, and not use it as an excuse to cast blame on our fellow humans. Blame that can result, during our hour of crises, as a reason to blow ourselves to pieces.
http://www.thehillsgroup.org/