Oil prices hit $50 a barrel, leaving some confident of further recovery
May 26– SAN DIEGO-Oil prices, battered after a slump dating back to the summer of 2014, touched the $50 a barrel level for the first time in seven months Thursday.
The prices of West Texas Intermediate and Brent crude each fell slightly below $50 by the end of the trading day after some profit-taking by some investors, but reaching the $50 mark offered a psychological boost to an industry that has taken its share of body blows.
WTI, the benchmark price for oil in the U.S., closed Thursday at $49.48 a barrel. Brent, the benchmark in most global markets, was at $49.59.
As recently as Feb. 11, the price of oil was below $27 a barrel.
While many analysts were hesitant to make any bold predictions based on Thursday’s news, much less declare the oil slump over, the head of one of California’s prominent oil consulting companies was decidedly upbeat.
“There is an air of optimism right now and we think we have turned the corner,” said Saeed Irani, president of Irani Engineering, which drills and completes wells for independent petroleum producers.
“There is a feeling we’ll have one more drop, but it will be short-term and there will be full-blown activity at $60” a barrel, Irani said.
Robert Rapier, chief energy analyst for Investing Daily, was looking at prices with a wary eye.
“I think the market has gotten a little bit ahead of itself,” Rapier said, saying rising prices may stimulate production at the same time oil inventories remain swollen.
“If that (production) comes online it’s going to slow down the draw-down in inventories,” Rapier said, which would lead to another price drop.
Why have oil prices bounced back?
“Production is going down and demand is going up. That’s usually a recipe for higher prices,” said Dan Steffens, president of the Houston-based Energy Prospectus Group.
The number of active oil and gas rigs in the U.S. dropped to 404 last week, as compiled by the oilfield services company Baker Hughes. In September 2014, 1,931 rigs were up and running.
Since the start of 2015, 63 oil producers in North America have filed for bankruptcy and huge energy companies have consistently turned in lower quarterly earnings. Oil giants such as Shell and Chevron have reported falling earnings and put big projects on the back burner.
Geopolitical instability is another factor in the price rise, especially for Brent crude.
Repeated attacks by militants in Nigeria have disrupted its oil flows and the increasingly desperate political situation in Venezuela has led to the country’s lowest oil output in eight years.
Nigeria and Venezuela are each members of OPEC.
A massive fire in Alberta earlier this month cut Canada’s oil production by nearly one million barrels a day and has added to a general sense that excess production is finally getting absorbed and the market may be moving closer to achieving balance.
The anticipation of higher demand is also helping boost prices as the Memorial Day weekend looms and the summer driving season begins.
“I’m getting more calls,” said Irani, whose company is based in Sacramento. “People are getting sick and tired of sitting at home and not doing anything.”
The most recent rig count for California showed just five rotary rigs running in the Golden State, down from 44 active oil rigs in the fall of 2014.
Irani said he expects the number of active rigs to double “within four or five months.”
But Steffens said prices need to rise another $10 a barrel for the domestic oil industry to bounce back.
“Fifty dollars (a barrel) is probably still probably too low,” Steffens said. “We probably need to get back to about 70 before you’re popping champagne corks. But 70 will be like the new 100 because well costs have come down so much.”
One result of oil’s hard times is that producers have come up with more cost-efficient ways to extract oil and natural gas.
“It’s gotten people more focused on cost control,” Steffens said.
A boost in oil prices would lead to higher prices at gas pumps.
“It means higher prices than we have now but not substantially higher, maybe another 20, 30 cents a gallon above where they’re at right now,” Rapier said.
Oil prices were at $100 a barrel in June 2014 but a slow decline in prices quickly turned into a rout in late November 2014 after the Organization of Petroleum Exporting Countries, or OPEC, surprised global analysts by, instead of cutting production to keep prices high, keeping production levels up.
Though OPEC’s dominant member, Saudi Arabia denied it, the move was widely considered an attempt to blunt the booming shale oil industry in the United States and Canada.
“The market slump has stretched for a year and half,” said Rock Zierman, CEO of the California Independent Petroleum Association. “Several months of stable prices at this level would give producers the assurance to invest in more domestic production, which will help restore jobs and generate more tax revenue.”
Report courtesy of The San Diego Union-Tribune