Oil in Limbo: How Low Can You Go?

By Sarah Groen
VP Strategic Marketing

Well that was fast! Eighteen months of sustained high oil prices made a pretty quick turnaround over the past month. WTI fell to $81/bbl today from $95/bbl just a month ago. On Tuesday the drop in crude price was the single largest daily fall in more than three years. Though the shifting headwinds have been put in place over a few months, it got real in the past two weeks. Is fear and speculation driving the price decline or something more fundamental? Sifting through last week’s presentations and trades, it has become clear that a supply/demand correction is in place. Scares on the international demand front seem to have gotten the snowball rolling. Let’s review how we got here:

  • In September, the European Central Bank surprised investors with a cut in interest rates and new stimulus plans
  • In the first week of October, Saudi Arabia lowered the November official selling price for Arab Light crude to Asia – a move seen by many as initiating a price war
  • Based on the ECB move, lower European consumer confidence, demand declines in Japan, and slower than predicted demand growth in emerging economies, the EIA cut worldwide oil demand predictions on October 7th
  • All the while, production from North America continues to exceed predictions and the production growth is not being offset by geopolitical interruptions – production from Iraq hasn’t suffered from instability and Libya’s production has begun to increase slightly

In historical situations of supply/demand imbalance, the world has looked towards Saudi Arabia to balance the books. This go round, we’re not sure where the Kingdom stands quite yet. We know given supply and demand that the country’s revenue must fall but we don’t yet know if Saudi will choose to take that revenue decline in the form of lower prices or lower production. It looks like the country has a few options:exhibit-17-sgblog

  • Reduce production and support price alone. This doesn’t seem like a likely outcome for Saudi to give other OPEC countries (and political rivals) a gift like this, but it’s an outside possibility.
  • Lead OPEC towards a joint cut in production – something that hasn’t happened since 2008/2009.
  • Hold production and allow prices to fall. The lowering of price to Asia indicates this strategy so far, but even Saudi Arabia has a budget to balance and tumbling prices can’t be sustained by other OPEC members for an extended period. However, on the flip side of the coin – lower prices hurt investment into non-OPEC supplies like shale gas in North America. This is what has led to speculation over a “price war.” Is Saudi sacrificing price in order to maintain market share?

Most of the experts out there are expecting prices to hold within the $80 - $90/bbl range, but even at this range there are wide reaching effects on the North American market. crude-price-outlookMost of the development plays in the US such as the Eagle Ford will remain economic at this price level. Wood Mackenzie stated that 70% of US reserves remain economic at $75/bbl. However, this does cut some of the more exploratory basins out of the picture if prices remain at current levels or decline. We can also expect oil and gas operators to be concerned about cash flow and looking very hard at 2015 capital spend levels.

At MicroSeismic we’ve been pushing all along for more focus and drive to optimize the output of each and every well that is completed. It can be argued that our Completions Evaluation Services are even more valuable to operators during price downturns – with the tools to understand and improve the completion in real-time, our customers are maximizing the amount of recoverable reserves from each well and helping to keep cash flow coming in the door.

Whether limbo continues or prices rebound in a couple quarters, MicroSeismic will be here to help customers continue to add value across the board. If you have any additional insight to share on this topic, please feel free to reach me at sgroen@microseismic.com.