BRIGGS: Have We Reached The Bottom Of Oil Prices?

As we now approach the year and a half mark since the price of crude oil drastically dropped, analysts are now asking the question, “Have we reached the bottom”? The oil and gas industry has watched as crude oil prices dropped from $115 in November of 2014 to as low as $27 in January of this year.

Today, the global price for a barrel of oil is around $39. What can be made of the slight uptick in prices? U.S. production has declined finally, and it is projected that we will see another 400,000-barrel decline in shale oil production just this year. This decline, however, may be somewhat offset by new deep-water production coming online in the Gulf of Mexico. Overall, have we reached the bottom of the decline? Some analysts are saying that we could see $45 oil prices over the next year.

If the break-even point on a U.S. barrel of oil has been in the mid $60 range, then is $45 oil anything to be excited about in the near future? The answer could be yes. Producers across the United States have found new ways to be more efficient in their operations, thus cutting the costs of production. Depending on the area and or the formation, a barrel of oil can now be produced much cheaper today due to advancing technologies coinciding with methods of cutting costs at the wellhead.

In addition to lower costs, highly leveraged companies across the United States have merged, restructured debt and have been acquired. As a result of this, new start-up companies have been formed with stable investment capital to acquire these higher leveraged companies at much cheaper prices.

All of this discussion really begs the greater question, “How do we climb back up out of this mess?” Should we expect a recovery of the market to take one year, two years or five years before we see a return in production and operations industry wide. This question takes us back to the larger prospective of how we got into this position originally.

While global oversupply of oil is widely to blame for this current drop in prices and widespread downturn, many of the OPEC cartel members are now facing financial crises. Iraq is near bankruptcy, Venezuela has seen a 93% reduction in their currency value and Nigeria is hurting tremendously. In the United States, several hundred thousand jobs have been lost, hundreds of companies have closed their doors and the entire U.S. economy is beginning to feel the hurt of the oil and gas industry’s downturn.

It now becomes a geo-political waiting game. Will the major players of OPEC, Saudi Arabia, Iran and Iraq, back down on their production levels? That question is yet to be answered. However, it does seem that we can make a general assumption that we have seen the bottom and are at a bare minimum heading in the right direction.

It should go without saying that the U.S. natural gas market will most likely not be making a recovery anytime soon. Currently, natural gas is underpriced and oversupplied in the U.S. market. While the petrochemical industry is enjoying the low prices, the producers of natural gas cannot sustain themselves at a price of $1.86.

So while we cannot say we are in a recovery posture, we can hope that we have seen the bottom of the prices. As the saying goes, “we (hopefully) can only go up from here!”

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