We know the oil business has been booming due to shale oil extraction across the country, but there are several obstacles standing in the way – most notably lower prices that could halt production.
We’ve seen it happen with natural gas prices, and although prices are climbing higher, it is still not enough to usher in widespread shale gas exploration.
It is certainly a possibility that oil prices could fall in the range of $70.
This would have a wide range of implications for shale hotspots around the country – especially the Permian Basin, the most prosperous shale play in the country.
Although the Eagle Ford of South Texas and the Bakken of North Dakota are the most discussed landscapes of the shale oil boom, the Permian Basin has layers of rich natural gas and oil formations that have made this area a favorite among investors. And the Cline Shale within the Permian is considered an exciting venture for the future.
But lower oil prices could forestall new exploration.
In order for producers to break even on well production in parts of the Permian, prices have to be around $96. WTI crude has been around $99 lately, while Brent crude has been leading near $109, so if you’re an investor with stakes in West Texas and other plays, you’re in the clear for now.
And even if oil prices fall to the seventies, a good portion of the Permian will still be productive. The Eagle Ford only requires prices at $78 to be productive, and the Bakken requires $84.
But at $80, producers would only stick with the most lucrative regions, and it would stunt exploration growth. It would also put high-cost producers out of business, as was the case with natural gas. This would force producers to take less risk and stick with proven histories of positive well flows – something that could have wider implications for long-term growth.
Price Oil Implications
Will oil hit the $70 range?
Analysts are predicting a steep decline in oil prices in 2014, but I would not count on this lasting long.
A Forbes article from 2011 highlighted Exxon Mobil (NYSE: XOM) CEO Rex Tillerson’s candid explanation in front of a Senate hearing that supply and demand should have dictated oil prices to be $60-70, but oil remained above $100.
Why?
Tillerson went on to say that oil giants use oil futures contracts to keep prices higher. We know about the numerous allegations of price rigging in the markets, and OPEC has gone on record saying that oil would have to remain at the $100 mark to keep up healthy production. The Saudis could just as easily cap production to keep prices a little higher.
Bottom line, there are too many special interest groups who have the power to keep energy prices high, regardless of what the market says.
And what will the market say in the future?
Market signs indicate that prices could drop, and China could be one of the main causes. China is the world’s second largest economy, and it has enormous sway in the commodities markets.
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China’s economic growth has contracted over seven percent, which could lower Chinese oil demand by 500,000 bpd, Forbes reports. A Chinese recovery would mean oil would climb back to $90, but some analysts are predicting further downturn, which could bring oil prices to $70.
This would not only have a vast effect on Brent crude, but it would also affect WTI, since the markets are interconnected like never before.
And WTI has a special set of circumstances that could keep prices low.
As oil production increases, prices will inevitably go down unless some of that shale oil is exported abroad to keep prices stable.
We have seen this same trend in the natural gas sector, since there hasn’t been enough export approval from the Department of Energy to send liquefied natural gas abroad.
We could very well see the same scenario in oil if we don’t match our pipeline infrastructure and export capacity with growing production.
How Should You Prepare?
There’s nothing you should do at the moment, but if prices begin to slow, you may want to shift to areas with solid records of production to remain on the safe side.
Pioneer Resources (NYSE: PXD), for example, has a rosy estimate of 50 million barrels of oil equivalent in the Permian.
The good news for the Permian is that there will be better completion and drilling technologies in the future. But longer lateral wells will mean higher costs in the long run, and if oil prices are too low, this could affect operations.
Other worries are finding qualified workers, the regulatory environment, and water capacity to keep up fracking operations.
And you could see consolidation, where only the largest and most efficient companies will be able to operate in the region. This could be bad news for smaller companies and better news for Big Oil companies that have struggled to get in on the shale oil game.
Smaller domestic companies have been outperforming their larger counterparts, but Big Oil may be your safest bet – should those companies become more productive in shale oil operations in reaction to lower oil prices.
But here’s hoping that won’t happen.
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