Stable Oil Prices, Falling Rig Counts
Apr 9th, 09
As oil prices stabilize in the $50 per barrel range for the tail end of the first quarter of 2009, an alarming trend goes unnoticed in the wake of current economic confusion. Lack of investment, oil supply decline could have devastating effect on global economy and lead to new oil price highs.
The United States rig count reaches a 5 year low signaling the slowing of domestic exploration and production activities. For comparative purposes, towards the end of March 2009, there were 1,126 rotary rigs still working while just one year earlier there were 1,792 rotary rigs drilling in the US. This tremendous drop in rig counts is believed to be just the beginning, with some experts predicting a full bottoming out in the 2nd or 3rd quarter of this year. The implications however are quite alarming and going unnoticed. Fewer rigs are in production due to the credit crisis and price collapse however, the current situation will only buildup towards a halting supply crunch within a few years. With a bump in demand, old wells drying up and the lack of prominent discoveries, there will only be one direction oil prices are sure to go.
Prices have fluctuated minutely between the high $40 mark and low $50’s. Most movements have been dictated by inventory reports as well as stock market rallies. The Department of Energy reports US commercial crude stocks numbered 361.1 million bbl ending in the first week of April 2009. Prices have steadily followed along these reports and it came as a mild surprise to analysts that storage levels have risen to such highs nationally.
Worldwide, the International Energy Agency based out of Paris has lowered its estimate for global demand of oil for the remainder of 2009. This was attributed to the global slowdown, with the richer nations facing an unusually severe recession, and the lowered expectations of developing countries to increase their demand for oil. In their monthly survey, the IEA cut its forecast for demand to 83.4 million barrels a day, a 1 million barrel reduction and 2.8% lower forecast from last year.
On a broader scale, the IEA also warned of shortages – as soon as 2013, precipitating another global recession. According to their data, global oil supply capacity is on the decline and reserves will likely be reduced within the next four years. With the OPEC countries reducing production and investment levels down nearly 25% from last year, a global crunch in oil supply becomes a very likely scenario.
Such cutbacks are seen all across the spectrum, from majors like ConocoPhillips outlining a nearly $2 billion cut in capital spending on the year, to entire countries like Saudi Arabia participating in the OPEC cuts and delaying future projects until a price rebound. Large deepwater drilling projects have been cautiously tracking the price movements, as they may not be financially viable at low oil prices. And smaller, independent oil companies are facing a dilemma in spending nearly twice as much money to do the same amount of work, in the face of falling prices.
Many experts are concerned at this potentially dangerous mix of scaling back production and the potential of future demand once the global economy picks back up. Prices could potentially spike up again, although not to the same levels we had seen last year. Meanwhile gasoline prices increased to a new national average of $2.051 a gallon. April typically sees increased gasoline prices as refineries prepare to switch to summer blends and undertake their heaviest maintenance around this time of year.