Industry officials expect oil and gas markets to rebound in last half of 2002

Sam Fletcher
OGJ Online

HOUSTON, Feb. 14 -- Industry executives and analysts apparently are convinced that both international oil and US natural gas markets will rebound in the second half of this year.

"Long term, we believe the fundamentals for natural gas have not changed, so the question is not if there will be a rebound in (US drilling) activity but when," said Michael E. Wiley, chairman, president, and CEO of Baker Hughes Inc., Houston, in a telephone conference with financial brokers Thursday.

He said, "The (US) economy is showing signs of recovery, which should translate to higher industrial demand, and supply will be affected by the (current) decrease in drilling activity." As a result, Baker Hughes expects "a bottoming of rig activity in the first half of this year, with an increase in the second half at a rate roughly the same as the growth rate in 2000."

"If we are wrong," he said, "the recovery will be pushed out through another winter to 2003. Any scenarios for recovery sooner than the second half of 2002 are unrealistic."

The latest US drilling cycle that began its upswing in the second half of 1999 and then turned down during the third quarter of 2001"was natural gas driven. And the recovery will be natural gas driven," said Wiley.

Paul Horsnell, head of energy research for London-based JP Morgan Chase & Co., recently listed six market conditions that must be met to spur higher oil prices this year. Five of those are already in place to varying degrees, he said, including:

-- Economic recovery, "the sooner the better for prices."

-- Global oil balances "conducive to upwards price pressures."

-- OPEC cohesion to production quotas.

-- Sufficient non-OPEC production cuts.

-- Continued political uncertainty, "particularly over Iraq."

The sixth requirement not yet in place is for weekly US inventory figures to start reflecting a concerted draw down of oil products, Horsnell said.

"This may appear to be the most trivial, but in terms of the short run dynamics of the market, and in particular in terms of setting perceptions, it is the most vital," he said. "A large swathe of the market looks no further than the weekly US figures."

Much of the erosion of oil futures prices this year "can be explained almost entirely by those statistics," he said.

A pessimistic view of the general world economy is unjustified, said Horsnell. "The economy is shifting upwards through the gears. The dramatic improvement in emerging Asia that is already coming through in the figures is of particular significance to the health of the oil market," he said.

"Once the fog caused by over-reliance on US weekly data lifts, the trajectory for oil prices will be upwards," said Horsnell. "In short, we are forecasting a massive first quarter global stock draw. Further, we are not alone."

He said, "There is likely to be so little left in the cupboard outside the USA by the start of the second quarter that the pressure of the physical markets should be making itself felt."

Like Wiley on natural gas prices, Horsnell said, "Our (oil) price view remains not one of 'if' but rather 'when' the rise in prices starts."

The National Climate Data Center reported last week that the 2001-02 winter so far has been the warmest on record. As a result, it will likely end with more natural gas in storage than the historical averages.

Meanwhile, assessments by 25 of the 40 largest publicly traded US producers, who account for nearly 90% of total US gas production, indicate a drop of 0.5% in fourth quarter gas production compared with the third quarter, said Robert Morris of Salomon Smith Barney Inc.

"We believe that for the same reasons that domestic natural gas production increased only 1% last year with a 75% increase in the domestic natural gas rig count from the beginning of 2000 to the middle of 2001, production will drop only around 2% year-over-year in 2002," Morris said. "In other words, production should not 'drop off a cliff' as the domestic natural gas rig count continues to abate, because rigs that are being laid down are those that were adding very little incremental production when put to work.

"These rigs are being laid down because the volume of production added by each is too little to be economic with composite spot natural gas prices below $2.25-2.50/MMbtu," he said.

No weather-related factors are likely to push up US natural gas prices this summer. "Even if temperatures this summer are 10% warmer than last summer (11.5% warmer than the 10-year average), we estimate that this would result in only about 1 bcfd of incremental demand compared with last summer," Morris earlier reported.

Moreover, he said, an incremental increase in demand for power for summer weather won't necessarily translate into an increased demand for gas that "is likely to be largely, or more than, offset by ... increased hydropower supplies. In fact, we believe that increased hydropower supply could result in roughly 1-1.5 bcfd of reduced natural gas demand in 2002 compared with last year."

Morris predicted that final figures will show North American finding and development costs jumped more than 30% last year over 2000 levels. That, he said, "is likely to put greater emphasis on mergers and acquisitions, given that acquisitions of reserves have often come with a lower price than with the drillbit."

"We should not mistake the calm in today's natural gas prices as anything more than the low side of our normal business cycle," said R. Skip Horvath, president of the Natural Gas Supply Association, Wednesday at the Cambridge Energy Research Associates annual conference in Houston.

"Producers need to know both the depths and heights of the competitive marketplace in order to make proper investment decisions," Horvath said. "Volatility is normal and we should expect it of a healthy, competitive market going forward."

Since the early 1990s, the highest and lowest gas price levels in every cycle have both been just a little higher than in the previous cycle. Moreover, Horvath said, "the high-low price spread has increased. Neither of these two trends will necessarily continue, but both underscore the underlying volatility."

He said, "The reason for the volatility is simple: We are a commodity market and volatility is inherent in competitive commodities. But the long-term reason for the swings is more fundamental: supply."

"The fields where we drill are old, yielding less and less natural gas," Horvath said. "Today, we have to produce 6 tcf/year of new natural gas supply just to stay even, much less the amount required to meet growing demand. We can produce the natural gas required to meet market demands, but we must have changes in government policy to plan for the future."

Contact Sam Fletcher at samf@ogjonline.com

Related Articles

Newfield Exploration to close two regional offices

04/29/2015 Newfield Exploration Co. plans to combine its onshore Gulf Coast and Rocky Mountain business units into one operating region to be based in The Woo...

Canada’s crude oil exports reached record high in January

04/29/2015

Canada’s crude oil exports set a monthly record with an average of 3.11 million b/d in January, the country’s National Energy Board reported.

Hess reports 1Q net loss of $389 million, trims budget

04/29/2015 Hess Corp. reported a net loss of $389 million during the first quarter compared with net income of $386 million in first-quarter 2014. An adjusted...

MARKET WATCH: NYMEX prices edge higher after Strait of Hormuz incident

04/29/2015 Light, sweet oil prices settled moderately higher on the New York market Apr. 28 after briefly spiking to $57.73/bbl on news that the Iranian Revol...

BP starts 7-year West of Shetland drilling program

04/29/2015 BP PLC, on behalf of the Schiehallion co-venturers Royal Dutch Shell PLC and OMV AG, reported the start of drilling in Loyal field by Odfjell Drill...

Eni sees 1Q profit decline 55% year-over-year

04/29/2015 Eni SPA reported a first-quarter consolidated adjusted operating profit of €1.57 billion, down 55% from first-quarter 2014. The company says the de...

Cinguvu production starts offshore Angola

04/29/2015 Production has begun from deepwater Cinguvu oil field, the second field to be brought onstream at the West Hub project on Block 15/06 offshore Ango...

Total’s 1Q profit down 22%

04/28/2015 Total SA reported a first-quarter adjusted net income of $2.6 billion, down 22% from $3.3 billion during first-quarter 2014, citing a 50% decrease ...

BP reports 20% lower profits in 1Q, continues divestment program

04/28/2015 BP PLC reported that its underlying replacement cost profit for the first quarter was $2.6 billion, down from $3.2 billion for first-quarter 2014 b...
White Papers

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

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by
Available Webcasts


OGJ's Midyear Forecast 2015

When 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


Predictive Analytics in your digital oilfield - Optimize Production Yield and Reduce Operational Costs

When Tue, Jul 7, 2015

Putting predictive analytics to work in your oilfield can help you anticipate failures, plan and schedule work in advance, eliminate emergency work and catastrophic failures, and at the same time you can optimize working capital and improve resource utilization.  When you apply analytic capabilities to critical production assets it is possible to reduce non-productive time and increase your yield.

Learn how IBM's analytics capabilities can be applied to critical production assets with the goal of reducing non-productive time, increasing yield and reducing operations costs.

register:WEBCAST



On Demand

Cognitive Solutions for Upstream Oil and Gas

Fri, Jun 12, 2015

The oil & gas sector is under pressure on all sides. Reserves are limited and it’s becoming increasingly expensive to find and extract new resources. Margins are already being squeezed in an industry where one wrong decision can cost millions. Analyzing data used in energy exploration can save millions of dollars as we develop ways to predict where and how to extract the world’s massive energy reserves.

This session with IBM Subject Matter Experts will discuss how IBM Cognitive Solutions contribute to the oil and gas industry using predictive analytics and cognitive computing, as well as real time streaming for exploration and drilling.

register:WEBCAST


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

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