WTI has dropped below $40 a barrel on Monday, only to shoot back up to $42 on Thursday of this week. So what's going on here? Is there cause for optimism, pessimism? Where is the market heading?
As we explained in our last global oil market blog, though quite a complicated affair, the price of oil really breaks down to a simple issue of supply and demand. On the supply side, OPEC decided not to slow down their production and the United States has nearly doubled theirs in the last six years, pushing out historical oil suppliers like Saudi Arabia, Nigeria, and Venezuela, to name a few. They've had to start importing oil to emerging markets like China and India, instead of western markets. Further, we Canadians have also increased our oil production immensely in the last 6 years. Finally, loosening sanctions on Iran as a result of the nuclear deal has led to an increase in production in their country.
On the demand side, there are a few things going on, which have led to a weakening in the global demand for oil. Alternative energy systems are being invested in everywhere around the world, cars are becoming more efficient, there has been a major debt crises in Europe over Greece, and emerging economies like India and China are (possibly) on the brink of a recession. Last, with low oil prices, there's not demand for investment in new oil wells and new sources of production, which the market will eventually need as demand increases.
Despite all of this, we're still going to be optimistic at Fox Oilfield. Just last Thursday, August 26th, there was a snap back in the Oil market, which is the biggest 1 day gain since 2009. This is the result of an across the board snap back after China's huge stock market drop and subsequent stabilization.
Beyond this short term jump, there’s some reasons to be optimistic over the long term. Some believe that US oil production will drop from the high of 9.6 mbpd to under 9 mbpd. Second, the emerging markets, while their growth and demand for oil has slowed, it is still growing and we're being optimistic that there will not be a major recession in the emerging markets. It might not be growing at an ideal rate that’ll see oil prices skyrocket and demand surge, but it’s still growing, and that should affect oil prices by the end of the year.
“Despite poor headline macro data, most China oil demand data points remain resilient,” said Morgan Stanley analystic Adam Longson said.
There's a final thing to be optimistic about for oil producers in the United States and Canada: our industry has been shown to be both resourceful and resilient in the times of low oil. We've increased the speed at which we drill, which makes marginal oilfields economical at lower oil prices. If it costs about $20,000 a day to contract an onshore drilling rig, shaving four days off a well yields an immediate $80,000 in savings.
As a point of proof, consider this: oil rigs have gone from an August 2014 high of 1564 to this August of 674, but US production has increased, which is a testament to their resiliency. Chris Faulkner, CEO of Breitling Energy said “We’re paying less to drill, we’re paying less to frack, perhaps not 60% less (the drop in Oil prices), but that margin has helped. We’re doing things more efficient on our side."
When it oil does bounce back, the penny pinching resourcefulness of Canadian and American oil producers will mean record profits after weathering the oil plunge storm.
If you want to learn more about the current oil prices, here are some great articles/videos!
Oil prices are likely to bounce back from six-month lows to end this year higher and climb further in 2016.
Fox Oilfield is a construction, equipment, and oilfield hauling, trucking, and transportation company servicing a multitude of locations that includes Nisku, Leduc, Beaumont, Dawson Creek, High level, Fox Creek, Drayton Valley, Lloydminster, Fort McMurray, Sundre, Edson, White Court, Fort St. John, Fort Nelson, Fort Liard, Alberta, and Western Canada.