Alex Mills
By Alex Mills
A few weeks ago, I took two great-nephews and one great-niece to a water park, and they convinced me to get on the water slides, including this monster called the “Pirates Plunge.”
As I was watching the stock market and crude oil prices last week drop like a 200-pound guy crashing downward though the “Pirates Plunge”, I couldn’t help but wonder when was I going to hit bottom and how bad was it going to hurt? Well, the same is true of the stock market and crude oil prices: When are they going to hit bottom and how bad is it going to hurt?
Oil prices have been in decline since July 2014 after peaking at nearly $105 per barrel (daily posted price). By January 2015, the price had fallen by roughly 60%, and reached a low of $40 on March 17, a more than 60% decline.
News of China’s economic troubles surfaced when China devalued its currency. The slowdown in the Chinese economy has been critical to oil markets, because China is the second largest consumer of oil after the United States.
China’s economic woes coupled with the over supply of crude oil in the U.S. and worldwide forced crude oil prices on some leases in Texas to below $30 per barrel. Two companies in South Texas had posted prices at $28 on Aug. 26.
Petroleum economist Karr Ingham said crude oil prices are very volatile currently and look for wild swings up and down. As a matter of fact, the very next day prices rose more than 10%.
“We may see some bounce-back from that low point,” Ingham said, “but that doesn’t mean that anything has been accomplished to alleviate the over-supply that caused this problem in the first place!”
Ingham said the industry has numerous supply-related concerns:
- Texas production is up 18 percent year-over-year for the first six months of 2015, and US production is up 13 percent by that same measure.
- OPEC is out producing its quotas and Saudi Arabia and Iraq are the chief offenders. There is a very real prospect of significant amounts of Iranian crude oil entering the marketplace.
- US crude oil stocks are up some 8 percent year-over-year midway through 2015. And there is another one we hadn’t mentioned previously — a huge number of DUC’s (drilled but uncompleted wells) in the US. “These are hanging out there, just waiting to be brought online at some price point and that added production may only serve to prolong this period of time during which prices remain under negative pressure,” he said.
As a result of these concerns, “lower for longer” is the new mantra out there. Ingham predicted in January that the down turn would probably last 18 to 24 month “under the best of circumstances.”
“These are not the best of circumstances,” he said.
“Many had hoped the end was near – it probably is not. Now we are looking to 2016, and — I hate to say — even that is not a certainty,” Ingham said.
What’s the scariest thought?
No, it is not standing high in the air waiting to take a ride on the “Pirates Plunge.”
The scariest thought is that the crude oil market will mirror what has happened to natural gas post 2008, and prices have not rebounded in seven years.
Volatility definitely is scary, but returning to the exceptionally low prices from 1983 to 1999 is frightening, too.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
Speak Your Mind