First Oil

Well, here we are, with another forecast just barely under our belts, and already the upstream market and related financial indicators have changed. And those changes have created some short-term concerns, all in just over a week’s time. Ironically, we wouldn’t even be talking about the effects between Feb. 1 and Feb. 9, if we weren’t late in getting this February issue finished and off to the printer.

Numbers in the red. So, as of the end of Feb. 1, the New York Mercantile futures price for WTI crude sat at $65.80/bbl, and the Dow Jones Industrial Index was at 26,186.71. The WTI figure was not far from its highest point ($66.14 on Jan. 26) since the first week of December 2014, and the DJI number was not far off its all-time high of 26,616 .71, also set on Jan. 26. To the casual observer, everything looked relatively fine.

Then came Friday, Feb. 2, when the DJI lost 665.75 points, and the WTI price dropped to $65.45. “Experts” in New York said that the numbers were falling, because traders and investment houses were concerned about the bond market and renewed inflation, after a jobs report showed good wage growth. Then came Monday, Feb. 5, and the carnage continued. The DJI plunged 1,175.21 points, and the WTI price sank $1.30 to $64.15. Traders reportedly were also worried about the Fed possibly raising interest rates several times this year.

Accordingly, the deterioration continued through the week. By the end of Friday, Feb. 9, the DJI had retreated to 24,190.90, and the WTI price had sunk to $59.20. Thus, the DJI had lost 9.1% since the Jan. 26 high and had lost 29.4% of its massive increase since President Donald Trump was elected on Nov. 8, 2016. It also meant that the WTI price had lost all of the gains made in December and January, equal to a 10.5% drop since the Jan. 26 high point. Yet, the plunges have occurred in the midst of good economic news—the U.S. economy is growing at a 3%-to-4% rate, employment continues upward, wages are rising, and energy usage is increasing. 

Effects on the E&P market. In the short term, the decline in stock prices may mean that less capital is available for investment in projects, and thus companies may have to scale back or temporarily postpone the growth in drilling programs that they had planned for 2018. And the decline of WTI oil price, back below $60, may convince skittish operators not to get too far out in front, as they expand activity. So far, U.S. operators have shown a fair amount of restraint, for the very reason that oil prices cannot be trusted to remain steady. It’s rather ironic that the highs for both the DJI and the WTI futures price came on Jan. 26, the very day on which we hosted our annual Forecast Breakfast event for close to 400 people in Houston.

That morning, it was obvious that many in the crowd expected a big gain in U.S. E&P activity for 2018, more than our 12% prediction. Anticipating this mindset, we presented a list of factors that shaped our 2018 forecast. We pointed out that if oil prices get too high, OPEC may lose its patience and over-produce again. We also mentioned the number of DUCs that are accumulating, as well as the pressure pumping bottleneck, and the fact that due to efficiency gains, shale operators require fewer wells to achieve the same production. Time will tell whether our comfort with the numbers is justified.

A good regime makes a difference. In Contributing Editor Roger Bezdek’s fine article on federal oil and gas policy on page 35, as well as in Technical Editor Craig Fleming’s column on page 90, you will see plenty of examples of how a change of regime in Washington has made a massive difference in the health of, and prospects for, the U.S. upstream industry. Indeed, this editor would ask our readers, “can you imagine how miserably different things would be now for the industry, if Hillary Clinton had won the White House?” Even if it weren’t winter, that thought is enough to make one shiver. 

About the Authors

Kurt Abraham

World Oil

Kurt Abraham kurt.abraham@worldoil.com