BRIGGS: The Current Oil And Gas Downturn Might Be Our New Normal

The cat has long been let out of the bag. Saudi Arabia and OPEC have a goal to end the growth of the U.S. shale market. U.S. crude oil production has grown from five million barrels of crude oil a day to around 10 million a day. This does one thing for the global market: it disrupts OPEC’s market share. This being the main reason that Saudi Arabia has not reduced production in any capacity on the global market.

The price of oil first began to drop in November of 2014. Now some 10 months later, it becomes a waiting game of who can outlast whom. Can the U.S. shale producers find ways to cut costs and remain in the global game or will OPEC realize the costs involved with funding their participating countries’ social programs even though crude prices are so low.

One key reason that rigs are still running at all in the United States is due to the resilience of the service sector. The service companies have stepped up to the plate and offered reduced rates to the operators so that the drills can continue to turn. This begs two questions. How long can the service industry offer reduced rates and how long can the operators continue to drill with unprofitable oil prices?

Closing in on a year later, all players involved in the crude oil market as a whole are beginning to ask yet another question. Is this a short-lived “downturn” in oil and natural gas or is this the “new normal” for the global market?

Here in the United States, the industry is just now seeing production decline. While there has been a significant reduction in rigs across the country, production has remained steady. This is a direct correlation to the efficiency of the U.S. oil and natural gas industry. Thanks to technologies surrounding hydraulic fracturing and lateral drilling, the industry has been able to produce even more product with fewer rigs. Will the hold out plan by OPEC end up backfiring in their face? Can the U.S. shale industry remain strong?

Speculators on Wall Street and the top brass at many international oil and gas companies all seem to think that this downturn could indeed be a longer term new normal for the U.S market. However, this coin could just as easily be flipped over.

A few factors could take place over the next year that might send prices back up to a profitable level. The United States will hold a presidential election a little over a year from now. The current White House is in negotiations with Iran over a nuclear deal that also has oil and gas ramifications involved. And finally, at any given day, unrest in the Middle East could further disrupt oil prices across the globe.

The oil and natural gas industry in the United States has indeed been forced to lay off thousands of workers and hundreds of rigs have been shut down for who knows how long. But as always, the resilient nature of the entire oil and gas industry will remain strong no matter how long the wait.



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