AS OIL PRICES INCH toward $50/bbl and maybe beyond, the mood in the industry seems to be improving. There is a general feeling of optimism among industry participants, although some analysts and observers are urging caution and not to put too much weight on what may be a minor blip before prices start to fall again.
Here are some thoughts from various industry players and observers.
"The history of the oil industry is a tale of boom and bust cycles. But when oil climbed to $50 per barrel for the first time since last fall, it may have signaled the end of one of the most protracted slumps American producers have seen. . .The rise to $50 oil means a return to stability, particularly for domestic shale producers. At this level, companies that saw the value of their product drop more than 75% in less than two years might have the confidence to resume drilling activities - and the resources to begin repairing ailing balance sheets. . .I think we're moving into a period of greater stability for American producers." - Dan K. Eberhart, CEO, Canary LLC
Petroleum economist Karr Ingham who authors the Texas Petro Index (TPI) advises against reading too much into the recent oil price hike. "First, it may or may not be the real deal. Prices increased in part on the hope that some agreement might be reached between producing countries elsewhere in the world on production limitations, and that's a prickly proposition." He said that various other components of his price index have continued to drop, and industry employment in Texas will "almost certainly continue to decline for most of the rest of the year." History suggests that employment will trough and begin to increase a good six months after prices reverse course," he added.
"When oil prices first began to decline in mid-2014, many energy industry observers hoped that the slump would follow the pattern of the 2008 contraction, which, though painful, was brief. But we're now well beyond that possibility, and the time has come for the sector to remove its rose-colored glasses. This downturn will stay with us for a while, but it presents a unique opportunity for savvy oil and gas businesses to streamline operations and position themselves for success further down the line." - Charles Dewhurst, partner and leader of BDO's natural resources practice, writing in the firm's just-released 2016 Oil & Gas Risk Factor Report.
In its May Outlook report, Moody's Investors Service said it is maintaining its negative outlook for the global oilfield services and drilling industry based on the "dreadful operating environment and dismal earnings prospects" of the industry through 2017. Revenues and margins will decline sharply in the first half of 2016 across all OFS segments, said Moody's, adding that global land drilling activity will remain at depressed levels, except in the Middle East, Russia, and among OPEC member countries and with North America-focused drillers having the worst revenue visibility. Declining cash flows, the inability to reduce debt, and weak liquidity will cause severe stress in the OFS industry. Moody's also noted that despite the modest bounce in crude prices since the February lows, current price levels are still uneconomic for most producers.
James Cordier, founder of OptionSellers.com, an investment firm that specializes in selling options on futures contracts, warns that oil prices are reaching an annual peak and will begin pushing lower this summer. He is advising investors to consider taking profits on oil price-based investments, and adds that futures traders should consider going short in the coming weeks. He gives three reasons for his pessimistic price outlook:
The powerful seasonal tendency - oil prices tend to rally in spring in preparation for peak gasoline demand during the heavy driving summer months.
US crude supplies are at 100-year highs. The supply glut will get worse before it gets better.
Finally, he says the dollar swoon and Chinese buying will end this quarter. This will add to the bearish pressure on oil.
Rusty Braziel, president and principal consultant for RBN Energy and author of The Domino Effect, an Amazon best-seller about the transformative effect of the Shale Revolution, commented: "Whether we are seeing the beginnings of a recovery or not depends on your definition of a recovery. If recovery means back to $100/bbl oil, I think that is a long way down the road. If it means that prices below $30/bbl are behind us for a while, probably so."
He added "The Shale Revolution is a fundamental shift to a market we have not seen before. We know where the oil is. We can produce it, if the price is right. In other words, there is a base level of production in North America that can come on line within months of a sustained price signal over some level, let's say $55/bbl. This base level of production does not disappear at lower prices - it is simply put on hold, waiting for a signal from demand. Prices will increase when demand grows, but the increases will only be temporary."
Why temporary? "If oil prices rise, shale drilling will resume," he said. "And when production starts growing, prices will come right back down."