One possible reason for the recent surge: an industry in despair. U.S. drillers idled 94 rigs last week, the most in data going back to 1987, according to Baker Hughes. In the past eight weeks, 352 rigs were idled. BP on Tuesday said it will reduce spending to $20 billion this year, compared with previous guidance of as much as $26 billion. The cuts bring renewed focus to rig counts and raise questions about how low prices can go and still sustain the U.S. oil boom.
U.S. Rigs Fall to a Three-Year Low
The history of oil prices follows a golden rule: What goes down must come up. Goldman Sachs in December identified almost $1 trillion in investments in future oil projects that are no longer profitable with oil under $70 a barrel. Eventually, supply will shrink and prices will rise again.
At least that’s what the market might be betting on now.
Perk Earl on Thu, 5th Feb 2015 6:27 pm
Or it could be as simple as the value of the dollar going down recently, causing oil price to go back up some.
Plantagenet on Thu, 5th Feb 2015 6:29 pm
The global oil glut continues. US oil inventories hit 80 year highs last week. The falling rig US count is a good start at reversing the oil glut, but we’ve got to see more cutbacks then that.
James Tipper on Thu, 5th Feb 2015 7:08 pm
Plant, how long will the oil glut last? I mean intuitively we understand that peak oil is peak production so logically we would be hitting “80 year highs” but for how long?
Plantagenet on Thu, 5th Feb 2015 7:27 pm
@James
I don’t think anyone knows how long the glut will go on. In the past the Saudis have cut their oil production to smooth out the market, but they’ve been aggressively cutting their prices and leading the oil price down during this oil glut.
The oil glut could end tomorrow if the Saudis flip flop again and cut production. It could end quickly if Russia invades the rest of Ukraine or some other geopolitical catastrophe gets going. Or the oil glut could end when US shale oil production peters out, or Venezuela collapses, or something else happens in the oil market to cut supplies.
Time will tell.
redpill on Thu, 5th Feb 2015 7:47 pm
Being aware of the high decline rates in the fracking sector and how important new drilling is to production, can we estimate how long it will take for American production to meaningfully drop?
If the current “glut” is ~1.5mb/d, I’d think decline alone would deal with that in pretty short order.
Revi on Thu, 5th Feb 2015 8:03 pm
I think this “glut” will go away pretty quickly. It’s hard to believe that we have “too much oil” at this time in our history. Everything after this is the hard to get stuff, so we could do something that is almost unheard of. It’s called conserve it for when we are going to need it. That time could be soon.
Bloomer on Thu, 5th Feb 2015 10:59 pm
Companies are in the oil biz to make money (not to provide consumers with cheap fuel). Profits have to be substantial enough for them to want to invest capital. This is not going to occur at 50 dollars a barrel and even if oil does go back to $70, it may still not be enough to give oil companies the confidence to pull the trigger on new capital projects.
I believe prices overshot on the downside. It’s very likely we will eventually see oil prices overshoot on the upside at least until new oil production comes online and we reach an supply/demand equilibrium.
This boom bust boom cycle will of course create havoc on the global economy, so get ready folks we are in for a wild ride. We do indeed live in interesting times.
James Tipper on Thu, 5th Feb 2015 11:26 pm
@Plant
“The oil glut could end tomorrow if the Saudis flip flop again and cut production. It could end quickly if Russia invades the rest of Ukraine or some other geopolitical catastrophe gets going. Or the oil glut could end when US shale oil production peters out, or Venezuela collapses, or something else happens in the oil market to cut supplies.”
Very true, I hear it cost $755 to get condoms in Venezuela. The dirty secret about so many countries GDP numbers and government programs are utterly dependent on a few exportable resources(namely oil). Ergo when price collapses, so does their currency, long lines, shortages, and so on.
Saudis could very well cut production however, it might be time they want more money. Russia taking the Ukraine? I’m iffy about that one, the geopolitical implications against them would be huge.
Perk Earl on Fri, 6th Feb 2015 1:46 am
Here’s a Youtube video on oil/gas fracturing:
https://www.youtube.com/watch?v=VY34PQUiwOQ
rockman on Fri, 6th Feb 2015 6:57 am
Let’s address this glut bullsh*t one more time: does it indicate a glut when, at $50/bbl, oil I selling at a price (adjusted for inflation) higher then it has been 65% of the last 3 decades? At a price that twice as high as it was for many of those 30 years?
If one wants to use price as a metric to define “glut” that’s OK by me. But if so then one is stuck with defending that world had dealt with a oil glut for most of the 50’s, 60’s, 80’s, 90’s and for the first few years of the 21st century.
So have at it…explain those FACTS away. LOL. And if one isn’t using oil price to define a glut then what is the characterization based upon? Inquiring minds want to know.
Dredd on Fri, 6th Feb 2015 7:28 am
Roller coasters go up and down …
Wheeeeeee !!!!
Oops the track is out ahead …
Wheeeeeeee !!!
What a strange mentality it takes to waste time on the price of global poison.
westexas on Fri, 6th Feb 2015 7:41 am
One caveat about US inventories. Just as we don’t know what the global Condensate to Crude + Condensate (C+C) production ratio is (although it has almost certainly increased in recent years), we don’t know what the Condensate to C+C Ratio is for us oil inventories. In other words, it’s quite possible that condensate accounts for an increasing percentage of US C+C inventories.
Mike999 on Fri, 6th Feb 2015 8:49 am
I drive a hybrid, saving 60% on gas, yes you can thank me now.
My next car will be a plugin hybrid getting 100 mpge.
I converted my hot water heater to electric, ( instead of home heating oil ). I buy Wind energy now.
I’ve Insulated my home cutting my oil bill by 40%.
I saving to move to a house with two plugin hybrids and Solar panels.
When GM’ s 200 mile EV comes out, I’ll be buying that.
I plan to cut my oil bill by 80% in the next 5 years.
You’re welcome.
Mike999 on Fri, 6th Feb 2015 8:50 am
Triple pane windows and High efficiency 92% oil boilers are now available.
The cheapest oil is the oil you Never Buy.
Kenz300 on Fri, 6th Feb 2015 10:40 am
Save energy……..save money…… efficiency works.
Save the planet…….
It is time to transition away from fossil fuels…..
GregT on Fri, 6th Feb 2015 10:54 am
Mike999,
It’s good to hear what others are doing to mitigate the impacts of the coming transition. It sounds like you are making great strides in energy efficiencies. All good.
A couple of questions if you don’t mind. What are your plans for food, water, community and security?
In five, or ten years time, where do you plan on driving to with your plug in vehicles?
And finally; What do you plan on doing when you get there?
rockman on Fri, 6th Feb 2015 11:16 am
Greg – Mike is doing great…for Mike. And we should certainly give him credit for those efforts. OTOH what he’s doing isn’t worth sh*t for the rest of the world. If just 20% of the US let alone the world were “Mikes” we would be in much better shape. But it isn’t and I can see no sign that we will get close to that level in the foreseeable future.
Speculawyer on Fri, 6th Feb 2015 1:10 pm
I don’t put too much stock in the inventories. Yes, they help signal the current situation. But the amount of storage that exists is trivial compared to the amount of production & consumption. Those inventories can build up and deplete very quickly.
GregT on Fri, 6th Feb 2015 2:04 pm
“The history of oil prices follows a golden rule: What goes down must come up.”
Actually, I believe the golden rule really is, “What goes up must come down”.
We are still at oil prices twice those of historical non-deflationary era prices. As our economies continue to be marginalized by these higher prices, eventually oil will drop back down to what our economies can afford.
Ed on Fri, 6th Feb 2015 5:23 pm
rockman,
Each year it is more expensive to drill for oil because we are drilling more from more expensive places (arctic, ultra deep water, shale, sands, etc). Over the last 30 years, we didn’t get much from these areas so oil was much cheaper. Oil is priced based on he marginal cost of extracting the last barre of oil.
Kenz300 on Fri, 6th Feb 2015 10:44 pm
The future of transportation………..
https://www.youtube.com/watch?v=4-XenU6UEp