Latest oil price cycle offers lessons, insights


The peaks and valleys seen in oil prices the past 4 years offer insight into lessons learned in the oil price downturn of 1997-98 and future demand trends in the US market, says a senior economist with the Federal Reserve Bank in Dallas.

In the June issue of Houston Business, published by the Federal Reserve Bank in Dallas, senior economist Bill Gilmer said that, after the 12 months of low oil prices following March 1998, the industry should rewrite its rule of thumb that oil prices will never fall below $15/bbl.

The main lesson the industry learned from these swings, Gilmer says, was that too many companies focused on the record revenues and backlogs of work of 1997 and used these factors in making long-term decisions concerning staffing and equipment.

"If we adjust for inflation and examine the average quarterly price for crude oil after 1984, five of the six worst quarters of the past 15 years came in 1998 and early 1999," says Gilmer, adding that the infamous third quarter of 1986 now ranks eighth from the bottom.

The market for oil services and equipment seems to be bouncing back from depressed conditions, responding to excellent oil and natural gas prices, and heading into a period of very strong drilling activity. But Gilmer says the price swing from peak to trough in 1998-99 was largely unforeseen by the oil service and equipment industry. The performance of those sectors ultimately mirrors events in world oil markets, he added.

A 4-year journey
The recent surge in oil prices completes the cycle begun 4 years ago, says Gilmer, when the price of West Texas Intermediate was holding steady at $20-$21/bbl in mid-1996, supported by strong economic expansion in the US and around the world. At that time, drilling activity was strong and building, with 775 rigs at work in the US. But by early 1997, as the industry expanded from 800 to 900 working rigs, capacity constraints were felt, and severe shortages developed for drilling crews, drill pipe, offshore rigs, and geophysical skills.

"The exchange of Iraqi crude for humanitarian supplies finally began in December 1996, and the 800,000 b/d "was being absorbed with barely a ripple," said Gilmer.

Long-term retention bonuses became a common tool to keep crucial technical skills in a "red-hot" labor market, and conferences focused on how to attract people into the industry.

The Baker Hughes Inc. US rig count rose throughout 1997, peaking at 1,032 in September and remaining above 1,000 through December.

The Asian crisis caused no immediate impact on the world oil markets during the summer of 1997, but by autumn, slowing Asian growth was putting oil back into the world markets. The price of spot WTI slipped under $20/bbl on Nov. 17, 1997, a level it wouldn't revisit for another 20 months.

Prices continued to collapse in 1998, with crude falling to $16/bbl in January 1998, $15/bbl in February, and finally, under $12/bbl in June. With US crude oil inventories 6% above levels seen the previous year, the Organization of Petroleum Exporting Countries failed miserably in an effort that April to remove oil from markets and jumpstart prices, writes Gilmer. After falling below $12, the price continued to hold in the $12-14/bbl range for the next 9 months.

The rig count slipped below 900 in March 1998 and had fallen below 800 by September. International rig counts hit all-time lows in late 1998, and for the first time in the history of the Baker Hughes rig count, the number of rigs working in the US fell below 500 in April 1999. At this time, bankers were visiting producers to demand more collateral, cash-strapped producers were canceling work, and drillers were offering producers the opportunity to take advantage of "unforeseen windows" in their drilling schedules.

In March 1999, OPEC succeeded in its second try to raise prices. Joined by non-OPEC producers Mexico and Norway, Saudi Arabia agreed to take its first formal loss in market share since the Persian Gulf War. Spot WTI was selling for $12.53/bbl on Mar. 1 but quickly climbed back above $20/bbl, due to OPEC compliance with the cutback agreement and the return of strong global economic expansion.

Strong demand for gas during the summer of 1999 eventually drove crude oil prices back to $30/bbl. This spring, OPEC members agreed to add 1.45 million b/d into world markets amid concerns that oil prices topping $30/bbl could undermine the worldwide economic expansion that supported the price rise, Gilmer says.

The US rig count is again above 860 working rigs as the drilling market recovers, completing the cycle begun in 1996. Gilmer adds, however, that wide swings in oil prices are still possible, based on doubts whether unity alone among OPEC members can provide a floor for oil prices without substantial help from the world economy.

Shift to natural gas
The latest downturn accelerated the dominance of natural gas in the US drilling market as gas prices were increasingly isolated from the world oil cycle. The large fraction of US drilling devoted to natural gas instead of oil demonstrates a distrust of OPEC, says Gilmer.

Gas prices proved the positive surprise in the latest cycle of world oil markets. Gilmer says gas prices have generally remained above $2/Mcf since 1996. While oil prices collapsed in spring 1998, "gas prices barely flinched," briefly falling under $2 before reviving with strong summer demand for electricity generation.

Warm winter weather in spring 1999 led to the longest period of gas prices below $2, but gas hasn't fallen under $2 since then. Fuel switching in 1998-99 probably took place as gas prices eclipsed oil, but environmental restrictions on burning oil is limiting fuel switching. And the traditionally weak gas demand seen in the spring and autumn months is getting a boost from power generation.

"The resilience of natural gas prices throughout this 4-year period suggests a tighter supply of natural gas than many analysts have suspected," Gilmer wrote.

Lessons learned
From these latest swings in world oil markets, says Gilmer, the industry should learn "first, that linear thinking is going to get you into trouble, and extrapolating the present into the future never works. It was the unforeseeable event, a financial crisis in Asia, that sent oil markets tumbling," he said.

"Finally, what about OPEC's return to the driver's seat in world oil markets? Can we assume oil prices are on a permanent high plateau thanks to OPEC's newly found unity?

"Contrast OPEC's floundering efforts to revive oil prices in March and April 1998�just as crude prices collapsed completely�with its remarkable success only 12 months later. Holding the last barrels of crude to be delivered to market, OPEC can look potent at the top of the cycle, but whether cartel unity alone can provide a floor to oil prices without substantial help from the world economy is still open to question."

Related Articles

BHI: US oil rig count rises for first time in 30 weeks

07/02/2015 A sudden 12-unit jump in oil-directed rigs during the abbreviated week ended July 2 represented their first rise since Dec. 5, 2014, and helped lif...

BP to settle federal, state Deepwater Horizon claims for $18.7 billion

07/02/2015 BP Exploration & Production Inc. has agreed in principle to settle all federal and state claims arising from the 2010 Deepwater Horizon inciden...

MARKET WATCH: NYMEX oil prices plummet on crude inventory build, Iran deadline extension

07/02/2015 Oil prices plummeted more than $2/bbl July 1 to settle at a 2-month low on the New York market after a weekly government report showed the first ri...

Shell makes FID on Appomattox deepwater development in Gulf of Mexico

07/01/2015 Royal Dutch Shell PLC has taken a final investment decision (FID) on the Appomattox deepwater development, authorizing construction and installatio...

MARKET WATCH: Oil prices decline as US crude inventories post first gain in 9 weeks

07/01/2015 Oil prices on July 1 surrendered much of their gains from the day before after the release of a government report showing the first rise in US crud...

BHP, Woodside move to decommission Stybarrow field

07/01/2015 BHP Billiton Ltd. and Woodside Petroleum Ltd. have started preparations for decommissioning of the Stybarrow group of oil fields in production lice...

Tullow Oil provides production update on Jubilee, other fields

07/01/2015 Tullow Oil PLC reported that gross production for the Jubilee field offshore Ghana averaged 105,000 b/d in this year’s first half, up from 102,000 ...

Statoil to suspend Scarabeo 5 drilling rig

07/01/2015 Due to overcapacity in its rig portfolio, Statoil ASA said it has decided to suspend Saipem’s Scarabeo 5 dynamically position drilling rig after it...

FWS issues Shell letter of authorization on Chukchi Sea lease

07/01/2015 The US Fish & Wildlife Service issued Shell Gulf of Mexico Inc. a letter of authorization (LOA) related to the potential disturbance of polar b...
White Papers

Solutions to Financial Distress Resulting from a Weak Oil and Gas Price Environment

The oil and gas industry is in the midst of a prolonged worldwide downturn in commodity prices. While ...
Sponsored by

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by
Available Webcasts


The Resilient Oilfield in the Internet of Things World

When Tue, Sep 22, 2015

As we hear about the hype surrounding the Internet of Things, the oil and gas industry is questioning what is different than what is already being done. What is new?  Using sensors and connecting devices is nothing new to our mode of business and in many ways the industry exemplifies many principles of an industrial internet of things. How does the Internet of Things impact the oil and gas industry?

Prolific instrumentation and automation digitized the industry and has changed the approach to business models calling for a systems led approach.  Resilient Systems have the ability to adapt to changing circumstances while maintaining their central purpose.  A resilient system, such as Maximo, allows an asset intensive organization to leverage connected devices by merging real-time asset information with other critical asset information and using that information to create a more agile organization.  

Join this webcast, sponsored by IBM, to learn how about Internet of Things capabilities and resilient systems are impacting the landscape of the oil and gas industry.

register:WEBCAST



On Demand

Taking the Headache out of Fuel License and Exemption Certificates: How to Ensure Compliance

Tue, Aug 25, 2015

This webinar, brought to you by Avalara, will detail the challenges of tax document management, as well as recommend solutions for fuel suppliers. You will learn:

-    Why it’s critical to track business partner licenses and exemption documents
-    The four key business challenges of ensuring tax compliance through document management
-    Best practice business processes to minimize exposure to tax errors

register:WEBCAST


Driving Growth and Efficiency with Deep Insights into Operational Data

Wed, Aug 19, 2015

Capitalizing on today’s momentum in Oil & Gas requires operational excellence based on a clear view of what your business data is telling you. Which is why nearly half* of oil and gas companies have deployed SAP HANA or have it on their roadmap.

Join SAP and Red Hat to learn more about using data to drive process improvements and identify new opportunities with the SAP HANA platform running on Red Hat Enterprise Linux. This webinar will also show how your choice of infrastructure impacts the performance of core business applications and your ability to achieve data-driven insights quickly and reliably.

*48% use SAP, http://go.sap.com/solution/industry/oil-gas.html

register:WEBCAST


OGJ's Midyear Forecast 2015

Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected