In last week’s blog, we caught up with Andrew Bradford, oilfield services analyst with Raymond James, and asked him when he predicts the price of oil will go up and when rigs will get back to work. He had some good news, but it could be a bumpy ride and we are probably looking at later this year before things start to improve.
This week, we hear from Bradford on whether it will ever get to US$100 again, whether prices will continue to bounce around so much and what influences the oil price. Buckle up and read on!
Q: Do you think oil will reach US$100 levels again?
A: Never say never. Bradford does not think US$100 is in the cards for the foreseeable future; but it will likely get that high again someday.
He does think prices will get to between US$70 and US$75 in 2017. “This will make a big difference to getting rigs back to work,” he said.
Q: Will oil prices continue to be so volatile going forward?
A: You bet. One of the big reasons is today’s volatility in the global economy. Bradford commented that growth forecasts are changing on a weekly basis.
On top of that, there’s growing evidence that the U.S. economy is weakening, and that also affects how investors think.
“The volatility will be here for a while, still. It’s one of the more worrisome features; and is very frustrating to investors,” said Bradford.
Volatility makes investors jumpy, and less likely to invest their money in oil. And without large, traditional investors in the energy field, there is really no strong investor base.
Q: What are the top three or four things that influence oil prices?
A: It won’t surprise anyone that OPEC production is an important factor.
Bradford explains that OPEC’s recent stance has been to take back market share, since most OPEC countries can continue to drill in a low-price market.
“Their goal is to knock out companies or countries that need at least US$70 a barrel to drill and take back that segment of the market,” he said.
“I think they are succeeding at that, but they have to keep their vigilance up because if the price starts to rebound quickly, those higher-cost projects will simply start up again.”
Global demand growth is another important factor.
“Typically, demand growth is one million barrels of oil a day. That’s what we’re counting on for recovery,” said Bradford. “If the economy isn’t doing too well, you get lower demand.”
Right now, it’s a mixed bag.
“Europe’s economy is doing better, while North America is flat. India is doing well, China is still doing well, although at a slower pace than what we’re accustomed to.”
Non-OPEC supply, such as in North America, also affects the price, he said.
And, the U.S. Federal Bank also has an influence. Recently, the Fed, as it’s called, increased interest rates for the first time in 12 years.
As they start to increase interest rates, the value of the U.S. dollar rises, “and that makes commodity prices in general go down, crude included,” added Bradford.
A new development, the ultra-low gasoline and diesel prices in the U.S., are also contributing to “oil’s troubles.” Although beneficial for consumers, some refiners’ margins (the difference between what they pay for crude oil and what they get for the gasoline they sell) are actually negative, causing refineries to shut down.
Q: What are the differences for recovery in Canada, the United States and internationally?
A: “Canada typically recovers on a similar schedule to the U.S.,” said Bradford.
“The difference is that Canada has historically been losing market share to the U.S., and I don’t really see that stopping.”
Part of the reason is that Canada does not have the shale reserves the U.S. does. Also, Canada is losing market share, in part, because of our geography: Alberta and Saskatchewan oil is far from tidewater.
So, without pipelines, it’s harder to export Canadian oil.
Internationally, pulling back on oil drilling is harder to do than in the U.S. and Canada, so the initial slow down, and then the recovery overseas can be quite different and potentially slower.
“Logistically, it’s more challenging because they are larger projects,” explained Bradford.
It looks like we’re in for more dips and turns on the oil price ride. Check back on Andrew’s post last week for more on how prices affect our rigs and when they could return to work.