Oil: Fracking and the New Normal – 9/19/16

The U.S. Energy Information Administration (EIA) has raised its domestic output forecast for 2016 from an average of $41.60 a barrel to $42.54 on the return of drilling rigs and continued increases in productivity from existing wells. The estimated average of $51.58 for 2017 was unchanged.


Despite a rebound from the $30 a barrel prices that came with the worst of the supply glut, the resilience and scale of the U.S. shale boom is keeping prices depressed.

14 of 15 senior oil traders and executives interviewed by Bloomberg at the annual Asia-Pacific Petroleum Conference in Singapore expect crude to remain between $40 and $60 a barrel over the next 12 months. If they’re right, then the new normal in oil and gas prices could lower for longer.

So far, U.S. oil prices in their sixth month of trading roughly between $40 and $50 a barrel. The range reflects the deadlock facing the industry as shale-oil fields as their relative cheapness and quickness to start or stop production has keep prices lower for longer. Higher prices would prompt more output, any lower would force more spending cuts or even action by OPEC.

Many share skepticism on the efforts OPEC nations and Russia to cap output and shrink a global glut. Besides Russia’s history of cheating on agreements and the fact that Saudi Arabia and Russia are already pumping at record highs, tensions between Iran and Saudi Arabia have sabotaged recent efforts put an effectual output freeze in place.

The damage low prices have done to the oil and gas industry is staggering. More than 350,000 jobs in oil and gas have been cut since crude prices started to fall in 2014 from $100 a barrel levels. Dozens of companies focusing on shale have already declared bankruptcy, all companies with ties to the sector have seen their values drop, and the stock market as a whole has fluctuated wildly as a result. The effect of cheap natural gas has been especially devastating for coal as the market value of all coal companies has dropped to less than 1/10 of its value in 2014.

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For now, more traders are more focused on the re-balancing of supply and demand, as well as the steady decline of crude and crude product stockpiles, than any sort of political action. Fracking is here to stay, but the markets will need more time to find a new normal for oil and gas output and prices.

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