Buckle in…a roller coaster ain’t got nothin’ on oil prices

Falling oil prices

 

Oil prices have always provided our industry with a bumpy ride, but 2015 and 2016 have made us buckle in a bit tighter. The low price of oil has been, to say the least, extremely frustrating — and not just for everyone working in the oil patch. Much of North America has felt the impact.

Everyone is asking, how long can the downturn go on? Will the price recover soon?

So we asked Andrew Bradford, oilfield services analyst with Raymond James, those questions. He is one of the Canada’s leading industry experts in oilfield services.

The day we spoke with him, crude oil was as low as it had been in 15 years, at about $27 per barrel West Texas Intermediate (WTI), the North American benchmark. That price is just not sustainable for much longer, he said.

That means it’s going to go up; it’s just a matter of when.

 

Q: When will the oil market begin to change for the better?

A: It could be a bumpy ride. Oil might actually go lower before it starts to rise again, said Bradford. The industry will keep its “foot on the brake” until the market looks balanced, or even under-supplied. Right now, there’s a lot of oil on the market.

The price will stay low or have a weak recovery until big new projects in places like Indonesia and Brazil are, for the most part, onstream, he said.

Those projects were started when oil was still in the US$100 range, and they’ve been rolling out over the last 18 to 24 months.

But when the price of oil started to tank, oil companies began to cut their capital spending, starting in early 2015.

“We’ll start to notice there are no new projects coming on later this year,” said Bradford. That’s when things will start to improve.

Q: When will the price of oil begin to rise?

A: Bradford expects to start seeing a turnaround mid-year, but don’t expect it to just go up all at once. It may rise and fall a few times before starting to go up steadily.

“That would start to take place in mid-2016. But it’s an educated guess. There’s still uncertainty around that. It could be sooner, it could be late in 2016.”

The price will give some false starts, but when it starts to move, it generally starts to move very quickly.

“Once we get lift off, we could get there in less than a month,” Bradford commented.

Crude oil prices

Q: What price would oil have to rise to for more rigs to go back to work? 

A: Sooner or later this year, the price should start to get into the $50 range. That’s the price Bradford has his eye on for rig recovery.

“My expectation is that you’ll start to see recovery in rig counts in Canada as we approach US$50.”

By 2017, Bradford is calling for a price of US$70 to US$75 per barrel.

“The takeaway here is the price is too low to be sustainable. It will go up, without question. It absolutely has to. There’s not a single project, outside of Saudi Arabia, that is economic at this price.”

Q: How long does it take for rigs to go back to work after oil recovers?

A: Bradford believes that once the price goes up, it doesn’t take long for rigs to get back to work.

“There is about a one to three months’ lag between prices rising and rigs coming back on,” he said.

In next week’s blog, we continue our ride. Bradford will help us understand what makes oil prices go up and down like a roller coaster, and some of the differences between North American and international drilling.

 

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