Crude prices may be bottoming

Sam Fletcher
Senior Writer

As February opened, crude prices appeared to be "in the early stages of a bottoming process" amid growing speculation that production cuts by the Organization of Petroleum Exporting Countries might finally be catching up to the demand destruction from the international financial crisis.

In New Orleans, analysts at Pritchard Capital Partners LLC said OPEC is "moving forward diligently" with reductions below its 24.8 million b/d target. The 11 participating OPEC members, aside from Iraq, are expected to produce 23.6 million b/d in the 4 weeks ending Feb. 14, down from 23.7 million b/d in the 4 weeks through Jan. 17.

Furthermore, flattening of the forward price curve as the 12-month strip contango narrowed to $11/bbl from $27/bbl was seen by Pritchard Capital Partners as "a clear signal that OPEC production cuts are having an impact on the crude oil market."

During the last week of January, the March contract for benchmark US light, sweet crudes fluctuated between $41.44-45.73/bbl before closing at $41.68/bbl Jan. 30 on the New York Mercantile Exchange. In the first trading session of 2009 on Jan. 2, the March contract closed at $50.21/bbl, while the then front-month February contract was at $46.34/bbl.

At EnVantage Inc., a Houston advisory and energy investment firm, analysts said, "It is highly probable that the March WTI contract will follow the same track as the February contact and go back into the $30/bbl range, but we continue to see WTI prices trading between $35/bbl as a bottom and $50/bbl as a ceiling."

North Sea Brent historically has traded at a 3-5% discount to US benchmark West Texas Intermediate. However, analysts in the Houston office of Raymond James & Associates Inc. reported, "Since the beginning of 2009, this trend has reversed, with Brent oil…trading 10% higher than WTI [on Jan. 30]. We believe this is largely driven by higher than average inventory levels in the US, including at Cushing, Okla., the hub from which WTI is sold. In addition, the current contango forward strip is exacerbating the situation with a contract for WTI delivery in August 2009 trading at $52.07/bbl…thereby encouraging storage. We do not expect this differential to narrow materially as long as US inventories remain high."

The two benchmark crudes were moving "in diverging trends," with the WTI contango widening and the Brent contango narrowing, said Olivier Jakob at Petromatrix, Zug, Switzerland. "But given that the widening of the WTI futures contango is immediately offset by a rise in [US Gulf market] physical cash differentials," he said, "…Brent [is] a better benchmark of the world crude oil supply and demand."

Natural gas outlook
Although Raymond James analysts refrained from trying to predict winter weather Feb. 2 on Groundhog Day, they said, "We do foresee 6 more months, not weeks, of deteriorating natural gas prices."

Pritchard Capital Partners said, "Natural gas prices have declined sharply to multi-year lows as demand destruction appears to be outpacing any slowdown in domestic supply growth." However, with the US land rig count down 28% over the last 5 months, they expect declining demand and reduced drilling activity to result in a supply-demand balance by mid-year.

Raymond James analysts expect a 60% drop in the US rig count this year, compared with a 40% decline predicted just 2 months ago. The bigger reduction will include a 65% roll-back in the number of rigs drilling for gas and a 50% cut in the number drilling for oil.

However, they said US production likely will not fall "as fast or as far" as the rig count.

"Producers will stop drilling their least productive, least economic wells first," Raymond James analysts observed. "When we account for the highly productive shale wells and consider that horizontally drilled wells (the most productive) are being dropped from drilling programs at a much slower rate, we find that gas production will probably not fall as fast or as far as the rig count (in percentage terms)."

Meanwhile, they said, "We do not think a 60% decline in the rig count is priced into the stocks for North American gas-driven companies. Likewise, we still do not believe the magnitude of the gas markets supply and demand problem is priced into US natural gas prices. While we think a late 2009 gas price and stock price rally may still be in the cards, asset utilization rates and North American service company earnings should be down year over year in both 2009 and 2010."

(Online Feb. 2, 2009; author's e-mail: samf@ogjonline.com)

Related Articles

BHI: Texas anchors 90-unit plunge in US rig count

01/30/2015 The US drilling rig count plunged 90 units—a majority of which were in Texas—to settle at 1,543 rigs working during the week ended Jan. 30, Baker H...

Victoria extends drilling, fracing ban

01/30/2015 The new Victorian Labor government of premier Daniel Andrews has extended the coal seam gas (CSG) exploration and hydraulic fracturing ban in the s...

Oxy cuts capital budget by a third

01/30/2015 In the midst of falling oil prices, Occidental Petroleum Corp., Houston, expects to reduce its total capital spending for 2015 to $5.8 billion from...

Gas-turbine units in transit to Vostochno-Messoyakhskoye field

01/28/2015 JSC Gazprom Neft reported that six gas-turbine power units are in transit to Vostochno-Messoyakhskoye field in the Yamalo-Nenetsk Autonomous Region.

Eni lets $2.54-billion contract for Ghana FPSO

01/28/2015 Eni SPA unit Eni Ghana Exploration & Production Ltd. has let a $2.54-billion contract to Malaysia’s Yinson Holdings Bhd. for the chartering, op...

Chevron, BP, ConocoPhillips join to explore, appraise Gulf of Mexico leases

01/28/2015 Chevron Corp. subsidiary Chevron USA Inc., BP PLC unit BP Exploration & Production Inc., and ConocoPhillips Co. have pledged to work together t...

Carrizo cuts drilling, completion spending by 35%

01/27/2015 Carrizo Oil & Gas Inc., Houston, is cutting its drilling and completion capital expenditure plan for the year by 35% to $450-470 million, but e...

Stone Energy lets pipe supply, installation contracts for Amethyst field

01/27/2015 Stone Energy Corp., Lafayette, La., has let flexible pipe supply and installation contracts to Technip SA for Amethyst field on Mississippi Canyon ...

Hess cuts capital budget by 16% to $4.7 billion

01/27/2015 Hess Corp. has set a capital budget of $4.7 billion for 2015, down 16% from $5.6 billion spent last year. The company at the beginning of 2014 repo...
White Papers

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

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...
Available Webcasts


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

When 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



On Demand

Prevention, Detection and Mitigation of pipeline leaks in the modern world

Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 

register:WEBCAST


Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


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