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Has The E&P Industry Lost Touch With Reality?

Has The E&P Industry Lost Touch With Reality?

The U.S. rig count increased by 19 this week as oil prices dropped below $48 per barrel–the latest sign that the E&P industry is out of touch with reality.

Getty Images from The New York Times (July 26, 2015)

The last time the rig count increased this much was the week ending August 8, 2014 when WTI was $98 and Brent was $103 per barrel.

What are they thinking?

In fairness, the contracts to add more rigs were probably signed in May and June when WTI prices were around $60 per barrel (Figure 1) and some felt that a bottom had been found, left behind in January through March, and that prices would continue to increase.

Related: Oil Price Rout Set To Inflict Real Pain On Russia

Figure 1. Daily WTI crude oil prices, January 2-July 24, 2015. Source: EIA and NYMEX futures prices (July 21-24).

(click image to enlarge)

Even then, however, the fundamentals of supply, demand and inventories pointed toward lower prices–and still, companies decided to add rigs.

In mid-May, I wrote in a post called “Oil Prices Will Fall: A Lesson in Gravity”,
“The data so far says that the problem that moved prices to almost $40 per barrel in January has only gotten worse. That means that recent gains may vanish and old lows might be replaced by lower lows.”

In mid-June, I wrote in a post called “For Oil Price, Bad Is The New Good”,
“Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.”

Oil prices began falling in early July and fell another 6% last week. Some of that was because of the Iran nuclear deal, the Greek debt crisis and the drop in Chinese stock markets. But everyone knew that the first two were coming, and there were plenty of warnings about the Chinese stock exchanges long before July.

 

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