Why Oil Prices Could Stay Low For Years


Why Oil Prices Could Stay Low For Years

Oil prices have been rallying lately and there is mounting evidence that oil prices are poised to rebound from a historic bust.

- Rig counts hit new lows this week. Baker Hughes says the U.S. lost 34 oil and gas rigs, bringing the total in operation down to 954.

- Domestic crude oil production looks to have plateaued and the EIA expects it to drop lower in May. Virtually every driller is dramatically scaling back spending, which will increasingly cut into new output.

- Oil consumption is finally picking up, as drivers across the country take advantage of cheap fuel.

But what is the bust really over yet? ExxonMobil’s CEO Rex Tillerson thinks talk of a price recovery is premature. Speaking at the IHS CeraWeek conference in Houston, Tillerson said he thinks that oil prices will remain low for the next several years.

There's quite a bit of evidence to suggest that Tillerson may be correct.

For one, oil inventories continue to build. Although this build has slowed in recent weeks, it is still far higher than the average over the last five years. Until production slows to the point that consumers are drawing down inventories faster than they can be replaced, oil prices have bo room to increase.

Another notable factor that could limit any further increases in prices is the enormous backlog of wells awaiting completion. Most of the value of oil and gas coming out of shale, the most popular form of production right now, occurs in the first few months of production. Drillers are avoiding finishing hundreds of wells because selling into the low-price environment would earn them a lot less money than if they wait until prices rise again. The result is that there is a vast collection of shale wells that will be completed once oil prices increase which could bring a flood of new production online.

The precise effect on prices is debatable but the CEO of ConocoPhillips thinks it could send oil prices down once again.

“If you get a price signal, you'll see more supply come on,” ConocoPhillips Ryan Lance said at CeraWeek. “That certainly has the opportunity to exacerbate the problem depending on where demand is.” He went on to add, “If $80-$90 [per barrel] comes back, there's a good chance that $50-$60 comes back as well because of all the new oil that will come online from completed wells. Boom, bust, boom, bust.”

In addition to these factors if we look at the substantial declines in costs for drilling and Saudi Arabia now producing oil at the highest level in decade there seems to be lots of reasons why oil could stay low for some time.

Nobody knows where oil will settle for the next few years but we figure the CEO of Exxon would be fairly knowledgeable on the subject.

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