The bottom of the oil bust does not a boom make

The oil and gas industry is finally finding a balance, if not a profit.

Two years after West Texas Intermediate crude oil began falling from $109 a barrel, global demand has grown high enough, and oil production has dropped low enough, to begin balancing, according to the International Energy Agency. This is not to say the market is structurally sound – there is still an enormous amount of oil in storage – but it’s a step in the right direction.

Nations that are not members of the Organization of the Petroleum Exporting Countries are expected to produce 900,000 barrels a day less this year than last, according to the IEA’s latest Oil Market Report. Much of that drop came from U.S. companies that have slashed budgets and laid off 100,000 Texans because they can’t make a profit at less than $60 a barrel.

OPEC countries, meanwhile, have boosted production and lowered prices to capture market share in Asia, Africa and the Middle East. U.S. refiners are taking advantage and buying more OPEC oil.

“In the heady days when U.S. shale production was moving upwards very fast, it became fashionable to talk of lower reliance on traditional suppliers,” the IEA said. “The Middle East’s market share of global oil supplies rose to 35 percent, the highest since the late 1970s, and an eloquent reminder that even when U.S. shale production does resume its growth, older producers will remain essential for oil markets.”

U.S. production cuts are bringing about another kind of balance between how much U.S. oil companies spend and how much they make.

The difference between capital expenditures and operating cash flow at 39 publicly traded companies narrowed to losses of just $10 billion in the first quarter, according to the U.S. Energy Information Agency. That’s down from $25 billion last year, and a huge improvement on 2012 and 2013, when companies spent twice as much as they earned to drill as fast as they could borrow money to pay for it.

This doesn’t mean oil companies are making money again. Most are not. They’re just spending less or selling off assets, both of which will decrease future oil production and revenues.

This industrywide rebalancing, though, doesn’t mean higher oil prices or another boom. The jump in oil prices from $26 in February to $51 in June was not triggered by market fundamentals but was driven by seasonal trading.

Now that we’re in July, oil prices have dropped again below $45 a barrel. Huge crude inventories and an excess of refined gasoline and diesel fuel will continue to suppress prices until the surplus dries up, perhaps next year.

Analysts are debating how quickly oil prices will rise again, and when exactly will we return to the good ol’ days of 2013, when Houston added 120,000 new jobs.

The Baker Hughes count of active drilling rigs in the United States has picked up from 404 in mid-May to 447 last week as oil companies have started drilling again in anticipation of higher prices. But that’s still well below the 824 rigs that were operating this time last year, or the 2014 peak of more than 1,800 rigs.

Analysts at investment bank Goldman Sachs predict the U.S. oil industry will need to add 100,000 workers between now and 2018. But this is the same group that predicted $200 oil in 2008 and $20 oil last year, neither of which happened.

“You’ve got to love Goldman. They are always giving you something to talk about,” said Ed Hirs, an energy economist at the University of Houston and managing director of Hillhouse Resources, an independent oil company. “If it continues on this track, then oil at $70 a barrel by the end of the year is not outrageous.”

That’s not high enough or fast enough, though, to spark another boom for Houston, Hirs added. OPEC plans to produce even more oil, forcing U.S. companies to become more efficient and lower production costs, which by definition means oil field service providers will rely on fewer workers and lower margins.

Hirs said he knows of a 4,500-foot well drilled in Texas for only $125,000, a third of what it would have cost three years ago. While Halliburton would have charged $78,000 to take electronic measurements down the well during the boom, it only charged $12,000 this year, he added.

“It’s going to be a gradual rebuild, similar to what Houston has experienced in other times when a commodities market has overproduced,” he said.

The final, and most important, variable facing the energy industry is the global economy. Energy consumption is directly tied to economic growth, particularly now that rich countries are using less energy and almost all new growth is coming from poor countries. Any slowdown will retard the energy industry’s recovery.

Finding the critical balancing points between supply and demand, expenses and revenues, and production and consumption is critical to ending this oil bust. But while there are signs that the bottom is in, the rise back up will be a long, hard slog.

Chron