What is the price of oil telling us?
First, as prices fell last year when OPEC refused to cut its oil production in the face of slowing world demand, the industry kept saying that it could continue to produce from American tight oil fields at around $80 a barrel and be profitable. Then, as prices fell further, the industry and its consultants assured everyone that while growth in tight oil production would slow, it would still be profitable for the vast majority of wells planned.
Petroleum geologist and consultant Art Berman is probably the best representative from the skeptical camp. For many years Berman has been pointing to the high cost of getting fracked oil out of the ground. And, those costs led to negative free cash flow for most tight oil operators for several years in a row–that is, they spent considerably more cash than they took in, making up the balance with debt and stock issuance. Not surprisingly, the operators took that money and kept drilling as fast as they could.
It was a recipe for oversupply and a crash, one that is now threatening the solvency of many fracking-dependent U.S. oil companies.
As if to the rescue, the giant consulting firm Deloitte called a bottom in the oil price when U.S. futures prices hit $48 a barrel on February 4–a little prematurely it seems. Friday’s price for September futures on the NYMEX closed at $42.50.
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