Energy Prices to Remain Low for the Long-Term

The U.S. exported 830,000 barrels of crude per day in March, a whopping 64.2 percent increase year over year. In February, it exported 1.1 million barrels per day, a nearly 200 percent increase year over year. According to The Wall Street Journal, the February numbers are closer to the new norm, as it expects the U.S. to export, on average, roughly 1 million barrels per day in 2017. This is a huge challenge for major oil producers, especially Saudi Arabia and Russia.

In December 2016, OPEC and its oil-producing partners agreed to cut production by about 1.8 million barrels per day, or roughly 1.5 percent of global crude production at the time. OPEC, led by the Saudis, has largely made good on this pledge, reducing production by 1.1 million barrels per day in the first quarter of 2017. The Russians have played with the numbers, cutting production compared with December 2016 levels but not in year-over-year terms. The OPEC deal managed to stabilize oil prices around $50 per barrel, and last month the cuts were extended for another nine months. But in 2017, OPEC will produce only about 40 percent of the global supply, and the U.S. is among the top three producers in the world. This means that even the combined forces of OPEC and non-OPEC producers can’t prop up oil prices unless they are willing to slash production more severely. It also means that there is enough oil on the market, partly from the U.S., to satisfy demand, even when major producers limit their supply.

Maintaining prices at current levels is the best outcome these producers can hope for. But even this comes with the downside of losing market share to competitors, without getting oil prices back to the levels that Russia and Saudi Arabia would need to stabilize their economies.”

Figure 1 shows historical oil and gas prices since January 2000. On June 6 last year, the daily spot price of West Texas Intermediate (WTI) rose through $50 for the first time since July 21, 2015. Since June 2016, the price has ranged between a low of $40.05 in August last year and a high of $54.00 in February this year. WTI spot on June 12 this year was $46.10. In other words, the price has gone nowhere in over a year. Data source is the EIA.

Weekly U.S. stocks of crude oil, excluding the strategic petroleum reserve, declined for eight consecutive weeks through May 26, bounced back in the week ending June 2 and declined again on June 9 (Figure 2). However, stocks are still historically high. EIA’s April 2017 Short-Term Energy Outlook (STEO) expects that electricity generation fueled by natural gas this summer (June, July and August) will be lower than last summer, but it will continue to exceed that of any other fuel, including coal-fired generation, for the third summer in a row. The projected share of total U.S. generation for natural gas is expected to average 34 percent, which is down from 37 percent last summer, but still exceeds coal’s generation share of 32 percent.

The total number of operating rigs in the U.S. on June 9 was 927, and has risen steadily since its low point of 404 on June 27, 2016. The oil rig count hit a low point of 316 also on June 27 last year and has since risen to 741 on June 9. The U.S. gas rig count has risen from its low point of 81 on August 5 last year to 185 on June 12. The year-on-year growth rate of U.S. plus Canadian total rigs was 121 percent in the latest data. Figure 3 shows the Baker Hughes Rotary Rig Counts for oil and gas equipment in the U.S. (Explanation below).

On a regional basis in the U.S., the big three states for operating rigs are Texas, Oklahoma and North Dakota. Figure 4 shows the land rig count in those states since 2000 and that non-conventional drilling in North Dakota has declined by 75 percent from its heyday in late 2014. This is not as bad as it sounds because previously drilled and capped wells are being put back on stream. The Dakota Access Pipeline is open for business. Bakken oil producers now have the ability to ship 520,000 barrels per day by pipeline rather than by rail to the hub near Patoka, Ill., where refiners in the Midwest can access the crude. An additional option is to ship to the hub near Nederland, Texas. According to The Hellenic Shipping News, “A producer in the Williston Basin, who did not wish to be identified, said on Thursday that the start-up of Dakota Access will result in higher netbacks. In 2014, the company had to sell its crude oil at a discount of about $9.60/b to WTI; today its $2.96/b.” Prices in the Bakken may improve even more once refiners get used to using its higher quality.

Baker Hughes Rotary Rig Count: This is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States. Rigs are considered active from the time they break ground until the time they reach their target depth.  The Baker Hughes Rotary Rig count includes only those rigs that are significant consumers of oilfield services and supplies.