On The Road with ITR Economics

  • by itradmin - Thu, 04/20/2017 - 13:55

US Crude Oil Prices have been trading in a relatively tight range in the low $50s per barrel since late last year (3-month moving average basis). The persistent sideways pattern of recent months has several factors behind it, including evidence that the United States is continuing to add output to offset production cuts from OPEC, the ongoing push by the major oil companies to lower the breakeven costs of production, and rising inventory levels. These forces, among others, illustrate that the fundamentals in the oil market are not supportive of a significant rise in Oil Prices this year. ITR Economics’ forecast calls for the Oil Prices 3MMA to be in the mid-to-high $50s by year-end.

US Crude Oil Production on a monthly basis is generally rising off a September 2016 low, and is currently at the highest level in 12 months. The 12/12 rate-of-change for Production ticked up in February for the first time in nearly two years, indicating a tentative transition to Phase A, Recovery. The US Oil Rotary Rig Count stood at 789 rigs in operation in March. This is nearly double the number of rigs drilling for oil in May 2016, which was 408. This is a clear sign that further gains in the US Oil Production volume are highly likely.

Furthermore, oil companies such as ExxonMobil, Royal Dutch Shell, ConocoPhillips, and ChevronTexaco all had 2016 breakeven prices below $40 per barrel (see chart below).

This indicates that their drilling and pumping activities aren’t likely to abate in 2017, especially with oil prices in the $50s. As I recently heard from the CEO of one of the oil services companies operating in Texas, “What the industry is doing in terms of technology is incredible…one of our clients’ wells goes a mile deep, which is not unusual in itself. What’s truly remarkable, is that the client has used horizontal drilling techniques to create multiple wells parallel to the vertical wellbore, each also nearly a mile in length, greatly increasing the amount of oil that can be extracted from that well location.”

When one considers all of these factors together, it’s quite logical to expect relatively little upside movement in oil prices this year given the current industry fundamentals. Assuming the status quo remains in place, there just aren’t any significant forces that would cause it to move higher. Of course, we are constantly on the lookout for any black swan events, such as eruption of war in the Middle East or any prolonged supply disruptions. Barring these, our expectations for further oil price rise are quite tame.

Alex Chausovsky
Senior Analyst