Upstream Texas - Fall/Winter 2016 - 13
HARD DATA SUGGEST LOW OIL
PRICES ON BORROWED TIME
IN LATE JULY AND early August, when oil
prices swooned and gave up much of the ground
they had gained in the preceding months, oil
and gas industry analyst Seth Kleinman, head
of energy strategy for Citigroup, heard chatter
suggesting summer 2016 was a repeat of summer
2015, complete with a first-part rally and a
subsequent collapse. He wasn't buying it though.
"If you look at positioning, it looks identical
to last year, but there is a crucial difference,"
he said in early August. "That is, this time
last year only the United States was rolling
over. Production was going down in the United
States, but nowhere else."
For further evidence that the word on the
street isn't always right, he recalls how during
that summer of 2015, conventional wisdom
held that slumping oil prices would quickly
cut into worldwide output.
"Instead, production outside the United
States was very strong," Kleinman explains.
"International oil companies were desperate
for cash flow to meet debt obligations. National
oil companies' governments were screaming
at them to increase production because they
Since governments tried to make up some
of the difference between $100 and $50
oil by way of sheer volume, exploration and
infill drilling collapsed, as did maintenance,
Kleinman describes, and NOC's emphasized the
quick-fix of "drilling for cash," he characterizes.
One year later, he reports, "The list of
countries in which decline rates are
clearly accelerating-where the skipped
maintenance is hitting production-
continues to grow. What is not growing is
the number of projects getting sanctioned."
According to Kleinman, the typical number of
big oil and gas projects to get the green light
across the globe in an average year is about
40, but 2015 saw only 15 of them, and 2016's
pace falls short of even that modest number.
Kleinman noted that during the first eight
months of 2016, there had only been six-
and only the one in Tangiers was classified
as strictly an oil project.
Swinging To and Fro
As Kleinman considers the oil market's next
6−12 months, he indicates that the world's
excess crude supply seems to be draining
away, although first in places where that is
tougher to confirm.
"At pricing points such as Cushing or the
North Sea, the market still looks pretty heavy,
but there are numerous indications we are
drawing down inventories in the shadows and
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