Alex Mills
By Alex Mills
Crude oil inventories grew again last week putting more downward pressure on crude oil prices.
The U.S. Energy Information Administration (EIA) reports that crude oil imports totaled 413.1 million barrels compared to 358.1 for the same period last year. That’s a 55 million barrel increase or 15%.
The oversupply of crude oil has caused the U.S. average price to decline from $97.49 per barrel to $48.24, according to EIA, which is a $49.25 decline (51%).
Petroleum economist Karr Ingham, who authors the Texas Petro Index, said last week that the oil and gas industry is in for a rough ride in 2015.
“There is every reason to believe the Texas Petro Index will lose 40% of its value, dropping to well below 200 from its peak of 312.9,” Ingham said.
“In the 2008-2009 contraction, the price decline was deep but short-lived and the TPI declined by nearly 35%. While it is possible the duration of price decline this time around could be short-lived as well, the fundamentals don’t quite suggest that will be the case,” he said.
Ingham said the industry could lose two-thirds of the drilling rigs from 906 down to 300, and about 50,000 jobs during this downturn.
“Over 130,000 jobs have been directly added to the upstream oil & gas industry in Texas over the course of the expansion now coming to an end (and we do not yet know for sure whether industry employment has peaked or not – but if it hasn’t it’s about to),” he said. “Again, a realistic assessment suggests that we are going to lose at least 50,000 of those jobs over the course of this contraction, and frankly that number could be higher.”
Ingham said that that is the nature of the “falling dominoes.”
“Price first, and the resulting decline in production value, then drilling permits, rig count, and ultimately employment with a lag time of a few months,” he said.
“The last domino to fall will be the actual volume of crude oil production. This is, of course, the signal being sent by the market to producers — to reduce production and do it ASAP. But it just doesn’t happen that quickly. New production is still being brought online as we speak and production will continue to grow for months into the future, perhaps even all through 2015. So the one occurrence that needs to happen the soonest will actually take the longest.”
Ingham said that this decline is unlike the events of 2008-2009.
“This is very much a supply-driven event, and it just looks like production will need to peak and then decline before much upside price support can be expected,” he said. “It’s not that we may not get some moderate relief from current low prices, but prices will need to rise fairly significantly in order to begin to turn things around, and we should prepare for the possibility that that may not happen in 2015.”
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
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