World oil prices will rise “substantially” in the coming months after hitting the bottom of a months-long rout several weeks ago, with a supply squeeze looming as early as this summer, according to PIRA Energy’s Gary Ross.
The “magic of price” has caused a rapid resurgence in global oil demand and triggered a surprisingly steep collapse in the number of U.S. drilling rigs that may be more difficult to reverse than many expect, Ross, a founder and executive chairman of influential consultants PIRA Energy Group, told Reuters in an interview.
“The balance is getting tighter and while we’ve accumulated quite a bit of inventory, and we may accumulate a bit more, the worst is pretty much over,” said Ross.
And Saudi Arabia’s spare production capacity has dwindled as the kingdom pumps oil at a record rate, leaving the global market facing a summer of higher demand and growing geopolitical risks with a spare supply cushion of as little as 700,000 barrels per day (bpd), or around 0.7 percent of the market.
“The world has been focused for the last six months on destroying supply,” Ross said on Monday. “Increasingly the mindset is going to change, they’ll have to start thinking about creating supply again, and that’s going to mean a lot higher prices than today. Substantially higher.”
To see a video of the interview: reut.rs/1DxWk93
PIRA, one of the first big energy consultancies to anticipate the tumble in oil prices last fall, is among others, including big commodity traders Gunvor and Vitol, in calling a bottom, despite U.S. crude stocks that have swollen to record levels more than 20 percent higher than last year.
Beyond calling the bottom, however, Ross is taking a more bullish view than some analysts who have warned of a prolonged lull or a new slump to as low as $20.
“Prices are way too low; they can’t last, especially with such small spare capacity,” he said.
SAFE HARBOR STATEMENTS:
Certain statements in this blog post may contain forward-looking information within the meaning of Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the safe harbor created by those rules. All statements, other than statements of fact, included in this release and other potential future plans and objectives of the company, are forward-looking statements that involve risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statement.
The slump in oil prices is more than a year old now, with bad news continuing for producers around the world, including those responsible for the shale revolution in the U.S.
Just look at second-quarter earnings, which largely show disappointing results again for oil companies and their shareholders.
But while there may be no end in sight for the industry’s dilemma, there may be a silver lining for producers, especially those using the downturn to hone drilling techniques, like hydraulic fracturing, to reinforce their output and profits later.
Among those who see such positive signs for drillers is Bill White, the chairman of Houston operations for Lazard, the global investment bank, and a former three-term mayor of the Texas metropolis.
“Most of the shale oil and gas is produced from a relatively small percentage of the shale wells and a fairly small percentage of the fracks in each well,” White said in an interview. “When the industry learns to drill more wells like the best wells and to make more fracks productive, you will see a vastly greater amount of oil and gas produced in the United States at the same total cost.”
White, while well known for his political experience in Houston, has spent much of his career in energy, including as an official in the Clinton administration and a chief executive of a company that built oil service businesses.
“This is a topic I discuss weekly and almost daily with senior executives of the service companies and the oil and gas industry,” White said. “There’s a lot of progress being made. In this sense, that is the next big chapter in the shale revolution.”
As an example, White cited the U.S. independent EOG Resources, which told investors in May that it could earn a higher return producing oil in Texas at $65 a barrel then than it did at $95 in 2012, thanks to new technology and other cost-saving measures.
“They’re producing more oil per dollar spent,” White said of EOG, which he noted is not one of Lazard’s clients.
Among the innovations coming down in cost is micro-seismic technology that interprets sound waves to more precisely guide the direction of drilling and the application of fracking, he said.
The energy research firm Wood Mackenzie offers a similar outlook in a new paper that draws a comparison with the lull in Gulf of Mexico drilling following the blowout of BP’s Macondo well in 2010 and a government moratorium on new wells.
“Operating practice and company psychology changed when players stopped running on a leasing treadmill and increased their focus on basin science,” Wood Mackenzie said.
Once offshore drilling resumed, the average size of discoveries was 30 percent larger, even as the number of discoveries fell by half, according to the analysis, which credits producers with using the slow-down to enhance the ways they vet prospects and design wells.
“Today’s tight oil wells are better producers than those drilled only a few years ago,” Wood Mackenzie said, referring to shale formations. “Expected ultimate recoveries have grown by over 10 percent each year with the application of better drilling technology, more robust modeling and experienced asset teams.”
With the “pencil-sharpening” exercises only increasing in the oil and gas sector, those improvements in ultimate recoveries will continue onshore as well as offshore, it added.
Said White: “If the last 10 years have been a shale revolution with a lot of excitement and celebration, then over the next 10 years we’ll be watching the revolutionaries pay greater attention to the critical task of deploying technologies that steadily lower the average cost of production.”