Predicting oil prices is especially tricky now because the oil market has never quite looked like this. Oil-price collapses of the past were triggered either by plummeting demand or an increase in supplies. This latest one had both.
By JONATHAN FAHEY, 2/10/15
An oil well owned by Apache Corp. in the Permian Basin in Texas. As prices have fallen globally, many U.S. communities that depend on oil revenue are bracing for hard times. | Spencer Platt / Getty Images
NEW YORK — The price of oil is on a wild ride, and there is little agreement on where it’s headed.
After falling nearly 60 percent from a peak last June, the price of oil bounced back more than 20 percent as January turned to February. Then, on Tuesday, it sank 5 percent, closing just above $50.
Oil has fallen or risen by 3 percent or more on 14 of 27 trading days so far this year. By comparison, the stock market hasn’t had a move that big in more than three years.
Predicting prices is especially tricky now because the oil market has never quite looked like this. Oil price collapses of the past were triggered either by plummeting demand or an increase in supplies. This latest one had both.
Production in the U.S. and elsewhere has been rising, while slower economic growth in China and weak economies in Europe and Japan mean demand for oil isn’t growing as much as expected.
As recent trading shows, any sign of reduced production inspires traders to buy oil, and every new sign of rising supplies sends prices lower. In a report Tuesday the U.S. Energy Department, citing unusual uncertainty, said the price of oil could end up anywhere from $32 to $108 by December.
“There are many more laps to come on this roller coaster,” said Judith Dwarkin, chief economist at ITG Investment Research.
As oil bounces up and down, so will the price of gasoline, diesel and other fuels. Almost no one expects a return to the very high prices of the past four years, so drivers and shippers will continue to pay lower prices. It’s a question of how much less, and for how long.
Those expecting a quick and lasting price jump see mounting evidence that drillers in the U.S. are pulling back fast because they’re no longer making money. A closely watched survey by the oil-services company Baker Hughes shows that the number of rigs actively drilling for oil fell to 1,140 last week, down 29 percent from a record high of 1,609 in October.
Oil companies have announced spending cuts in the billions of dollars; oil-service companies have announced layoffs of thousands of workers.
If companies stop drilling new wells in North Dakota and Texas, the centers of the U.S. oil boom, overall U.S. production could fall fast. Output from most of those wells declines far more quickly than production from more traditional wells. Analysts at Bernstein Research estimate that U.S. production declines at 30 percent a year without constant investment in new wells.
A quick decline in production would send prices higher by reducing global supplies. At the same time, demand could be on the rise. The U.S. economy seems to be improving rapidly, and demand for gasoline is increasing. Global demand may also rise somewhat simply because low prices tend to encourage more consumption.
If the oil bulls are right, it means prices for transportation fuels would rise and the slowdown in drilling activity in the U.S. would perhaps be short-lived.
Others say oil production is still rising and demand isn’t yet catching up — a recipe for lower oil prices.
The oil bears argue that there are plenty of rigs still working, and they are now focused only on the most prolific spots. Also, oil-services companies are charging significantly less for equipment and expertise. This means oil companies may be able to keep oil supplies rising from already high levels despite low prices.
The Energy Department reported last week that there was a record 1.18 billion barrels of oil in storage in the U.S. ITG’s Dwarkin estimates that in the first half of this year the world will be producing, on average, 2 million barrels per day more than it will be consuming.
Analysts at Bank of America Merrill Lynch say $32 a barrel is possible. Ed Morse, an analyst at Citi, called the recent rise in prices a “head fake” and predicts oil could plunge into the $20 range, the lowest since 2002.
The bears also don’t expect much increase in demand. Many developing nations are cutting back on fuel subsidies, which means that consumers could be buying less fuel, not more.
And demand in the United States and other developed nations won’t rise much, they argue, because of environmental policies and high fuel taxes.
After its recent rise, some think oil may already be close to finding its level.
The International Energy Agency said in a report Tuesday that prices will stabilize in a range “higher than recent lows but substantially below the highs of the last three years.”
In the past, once production went offline it took years to bring it back. Now, the IEA said, drillers can quickly and easily tap shale deposits to bring new oil to market as soon as supplies fall or demand rises. That should help keep a lid on prices.
Tom Pugh, an analyst at Capital Economics, forecasts that Brent crude, the most important benchmark for global crude, will end the year around $60 a barrel, within $4 of where it closed Tuesday — and to be at $70 by the end of 2020.
That doesn’t mean, however, that there won’t be further bumps along the way. “We wouldn’t be surprised to see more large price movements before the market settles down,” Pugh wrote.
WATFORD CITY, N.D. — High crude prices catapulted North Dakota into the top tier of the global oil market and doubled or tripled the size of once-sleepy towns that suddenly had to accommodate a small army of petroleum workers.
But now that those prices have tumbled, the shifting oil market threatens to put the industry and local governments on a collision course. Farming and ranching communities that committed to building homes, roads and schools for the swelling population are worried about how they will pay for those improvements as oil-related tax revenue evaporates.
“Everyone is asking the same question: ‘Holy cats, where do we go from here?'” said Dean Bangsund, an economist at North Dakota State University who has tried to help oil-rich McKenzie County gauge its needs, with an eye toward balancing growth against revenues. But none of his economic models were pessimistic enough to match how low oil prices dropped.
For now, the oil extraction goes on. Despite the price plummet, drilling remains profitable in the heart of the state’s Bakken oil patch, due to the sheer volume of crude flowing from so-called hot-spots.
And so the building continues in Watford City, a century-old town that once marked the end of the line for the Great Northern Railroad. Roughly 60 rigs are drilling in surrounding McKenzie County — 40 percent of the rigs statewide. New neighborhoods and retail centers creep ever deeper into former wheat fields.
“We’re making a new, 15,000-person city in the middle of a pasture,” said Brent Sanford, mayor of Watford, the county seat. “The question is if we get money put into the pot to do it.”
The county, which a decade ago had a population of about 5,000, has become a magnet for “man camps,” where newly arriving workers and their families live in trailers, RVs and just about any other structure that can stand up to North Dakota’s whipping winds.
The pace of growth over the past decade has been “hyperventilating,” slackening only slightly as oil prices have fallen, Sanford said. “You can’t catch a breath.”
With oil prices hovering near $100 a barrel for most of the past four years, ambitious plans were laid out to transform the city from a chaotic, sprawling crash pad for transient workers into a larger, more livable community. Sanford and other local leaders drafted a long wish list — more housing, more schools, better roads, a new water treatment plant and expanded law enforcement.
Developers eager to cash in started construction of thousands of apartments and single-family homes. A new high school and civic center began to take shape. A new bypass was built to the south of town to ease traffic jams.
Then oil prices began to drop, falling to roughly $50 a barrel now.
Daniel Kuo, vice president of a Chinese-backed real estate company that’s building a 2,000-unit housing complex on the outskirts of Watford, keeps a close eye on oil prices. He’s met with McKenzie County economic-development agents to soothe any worries that the company might pull back.
“You’re in too deep to let a price blip derail you,” Kuo concluded at the end of one meeting. He shared the optimism expressed by Sanford and many others in Watford that oil prices will stabilize and the boom will resume.
Leaders in the North Dakota Legislature have pledged to keep public-works improvements as a priority. Whether that’s sustainable depends on how long oil prices stay down. Oil and gas revenue forecasts for the state already have dropped $4 billion, reducing earlier projections by roughly half.
Watford and McKenzie County have joined other western North Dakota counties in seeking help from the state. Politicians and business leaders from the region flocked to the Capitol in Bismarck to press the Legislature for a larger stake of what’s left of the oil revenues.
Towns like Watford are worried about getting saddled with all the downsides of the boom — dangerously crowded roads, overtaxed utilities, jam-packed schools and unchecked growth — without the financial means to impose order.
“At this point, it’s like downtown Seattle,” said Aaron Pelton, who owns Outlaws’ Bar and Grill along Watford’s main thoroughfare. “If you can’t come to a small community and have a quality of life, what do you have?”
Like many oil towns, Watford has endured the boom-bust cycle before. Oil was first found in McKenzie County in 1952. Within a decade, hundreds of workers had moved on.
Another boom kicked off in 1976, with up to 100 wells a year being drilled until prices started plummeting four years later.
In the last decade, the industry refined the hydraulic fracturing, or fracking, technology that allows drillers to pull oil out of rocky shale. The fracking rush has seen more than 11,000 wells drilled, and analysts predict a total of 50,000 to 60,000 before all the oil is gone. Industry observers expect the wells already in place to sustain last year’s production level of 1.1 million barrels a day at least through 2015.
Still, the sudden drop in prices caught most observers off guard and shook confidence in the boom.
“If I could tell everybody that we’d have $70 oil in 2016, we could breathe easier,” said Gene Veeder, director of the McKenzie County Job Development Authority.
Repost from The Christian Science Monitor [Editor: Significant quotes: “The cost of getting oil out of the ground is high here. Unless the price of oil tops $73 a barrel, producers in Divide County can’t break even.” …and… “In Bakersfield, Calif., Canadian oil company Ensign Energy Services Inc. has already laid off 700 workers.” – RS]
Low oil prices chill a once-hot oil town in North Dakota
Just months ago Crosby, N.D., a small town on the Canadian border, was booming. Now it’s hunkering down to ride out the oil bust that has the US energy industry reeling.
By Jared Gilmour, January 24, 2015
Josh Young and his daughter Ava walk past the post office in Crosby, N.D., where falling prices have turned an oil boom into a bust. | Andrew Cullen/Special to The Christian Science Monitor
Crosby, N.D. — An empty strip of gravel – lined with streetlights and unused utility hookups – runs next to the highway, south of a once-booming oil town.
A few years ago, city officials anticipated oil field companies and other businesses would fill up the 230-acre strip. The city spent $1.7 million on the land, with another $9 million coming from state oil impact grants. There was talk of 300 housing units popping up in the fields behind the commercial street. The former mayor said the 1,300-person town was preparing to potentially double or triple in size.
But there is only one building along the road today. At night the streetlights shine on the gravel, illuminating flurries of snow that semi trucks have whipped off the nearby highway down onto the deserted street. To the south, farmland rambles into the middle distance, dotted with nodding pump jacks extracting oil, flares burning off gas, and idle, darkened drilling rigs.
“The year they proposed this they could have gotten quite a bit of commerce in there – but now? It’s like a street to nowhere. You’ve got streetlights on and nobody’s home,” says Cecile Krimm, editor of the county’s newspaper, The Journal.
Emptiness along the newly built road is a portrait of the “echo economy” – an America that looks at plummeting oil prices not as a sign of savings at the pump, but as potential trouble ahead. They are towns as remote as Crosby, where the recent oil boom drove rents to San Francisco levels, or as familiar as Houston, a metropolis bracing for as many as 75,000 layoffs.
This is the country’s echo economy. While the rest of the country struggled through a recession, these beneficiaries of the shale boom helped prop up the economy. The oil and gas industry created more than 100,000 US jobs between 2007 and 2013 – a 40 percent increase in US energy industry jobs and a 1 percent boost in total US employment. But as the national economy has found firmer footing, the drop of oil prices to five-year lows has begun to turn the tables on towns like Crosby.
In many ways, this lonely swath of North Dakota is a bellwether for America’s energy economy. Twenty-two of the 65 American counties that had fully recovered from the recession by 2014 were in or bordering North Dakota, according to a study by the National Association of Counties. Only Texas (with 24) accounted for more. So when Crosby’s once-bustling Main Street is less harried than it once was, and when fewer landmen are crowding into the rotunda of the county courthouse to scour mineral rights records for Divide County, it is a hint that oil-dependent towns from Ohio to California might soon be feeling the pinch.
For Crosby, the oil boom of the past decade has come with a catch: The cost of getting oil out of the ground is high here. Unless the price of oil tops $73 a barrel, producers in Divide County can’t break even. For years, that’s hardly been a problem, with oil consistently trading for more than $100 a barrel. As of mid-January, however, US crude is below $50 a barrel.
Oil production is costly in Crosby because it sits on the very fringe of North Dakota’s oil-rich Bakken region. The Bakken is essentially a bowl beneath North Dakota’s northwestern quadrant with more oil concentrated in the center where the bowl is deepest. Crosby is perched on the frigid northern rim, a few miles from Canada.
Being at the rim means less oil.
“We’re on the edge, and that won’t be to our advantage if oil prices continue to go down,” says Bert Anderson, Crosby’s affable mayor for most of the past 30 years.
Oil has revived his town, Mayor Anderson says, sitting in a sturdy wooden chair and peering at Main Street through the window of his shop, Bert’s Woodworks. The surroundings are a portrait of the modest farming town Crosby once was. Newspaper clippings from The Journal yellow on the door that opens to the back room, and a rainbow of paint chips hang on one wall. On another wall are a series of bald eagle prints next to a portrait of Cosmo Kramer from “Seinfeld.”
For now, Anderson is confident oil prices will rebound. Almost everyone in Crosby is optimistic. Anderson notes that several vacant lots along the empty road south of town are sold. They’re just waiting for development.
And even as drilling slows down, Anderson is grateful for how the boom reversed Crosby’s trajectory of decline and depopulation.
Before the boom, Anderson says, “Crosby was tearing down houses.” The population was dwindling. There was even a December when the city ran out of money before the end of the year, and had to take out a loan to make payroll.
Now, with rents rivaling those in San Francisco and new housing crowding the outskirts of town – from two-story tan condos to an RV park where newcomers camp out in “winterized” RVs – “we don’t have that problem anymore,” Anderson says.
But what if oil prices stay low? For years, Crosby has watched from afar as construction booms in Nevada, Arizona, and Florida went bust in the housing crisis, leaving unwanted and overvalued homes. Crosby isn’t there yet. A temporary slowdown could bring sky-high rents back to earth and give the town time to catch up on construction projects, Anderson says.
Still, oil prices are notoriously unpredictable. Most analysts say it’s unlikely that the US oil boom, fueled by the hydraulic fracturing of shale, will stop altogether. But oil prices stuck at $50 a barrel would challenge towns that live in the echo economy the shale boom has created, both in the Bakken and beyond.
Sweetwater, Texas, for one, is already facing Crosby-like problems. Expecting oil workers to flood its shale fields, the town spent nearly $50 million renovating its courthouse, building a law enforcement center, and improving the hospital. With the collapse of oil prices, however, those plans have not come to fruition, leaving the town of 11,000 facing layoffs and budget cuts.
“Here we are trying to figure out, is this a six-month problem or is it all over?” said Greg Wortham, head of the Cline Shale Alliance, which was formed to prepare the region for oil workers, to The Associated Press.
In Bakersfield, Calif., Canadian oil company Ensign Energy Services Inc. has already laid off 700 workers. Even in Ohio – hardly an oil mega-producer – U.S. Steel has warned of layoffs for 614 workers at a pipe plant, citing low oil prices.
In the Bakken, falling oil prices mean producers retreat to safer areas, like the counties at the epicenter of the Bakken boom: “places like McKenzie County and Dunn County, where break-even prices are $30 and $29, respectively,” says Alison Ritter, a spokeswoman for the North Dakota Department of Mineral Resources.
That could spell trouble for Crosby, which has invested millions in new infrastructure – from a multimillion-dollar hospital expansion to new housing for recently hired schoolteachers. And it’s unclear just when prices will rise, or at what range they’ll settle and find equilibrium.
“That’s just how oil works. Everyone’s seen it happen multiple times,” says Matt Nystuen, an oil rig worker whose jacket and hat, worn atop a mat of blond hair, give away his employer, Ensign Energy Services, before he can with his “Fargo”-worthy accent.
Mr. Nystuen was three years out of high school when an oil price slump during the recession slowed drilling. “I saw all of my friends lose their jobs,” he says.
Prices rallied, with oil trading at over $100 a barrel until this summer. Then crude oil production in Libya and Iraq began picking up and US production also surged, filling the global market with a glut of crude. At the same time, demand was down in recession-racked Europe and Asia, and the Saudi-led Organization of the Petroleum Exporting Countries decided to maintain production levels to hold their market share and drive down prices. Many interpreted it as an effort to drive US shale drillers, who rely on high prices, out of business.
All that pushed prices down, and when they began falling, the rig count in Divide County tumbled, too – from 12 in the late summer to just three active rigs in December. Prospects for the first half of 2015 are dimmer: Continental Resources alone, a major player in the Bakken, has slashed its 2015 capital expenditures budget from $5.2 billion to $2.7 billion.
In late December, Nystuen received his own surprise: He was laid off from his job on a rig in Divide County.
In Houston, the story is the same. Since 2011, Houston has added 100,000 new jobs every year on the strength of the energy economy, according to Forbes. By 2016, it could have lost 75,000 over two years, writes Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston’s Bauer College of Business.
“Given Houston’s dependence on oil exploration and production, there is never a good time to see oil prices fall as far and fast as they have in recent months,” his study says. But a construction boom in the city and the improvement of the national economy should help, it adds.
In Crosby, the situation is not yet dire, either. Since oil production slowed, the town has gotten sleepier. It’s more like it was in the decades before oil transformed Crosby from an idyllic farm town into a boomtown, says Ms. Krimm, the newspaper editor.
Signs advertising available lots are posted in the fields that abut the empty new street. And companies have begun layoffs, though Nystuen found a new job within days. All the same, he doesn’t expect to stay in the industry long – maybe a couple years.
If the boom ends, he says he’d happily move on to something else. For him and for so many others in Crosby, the oil wealth is useful so long as it lasts. The boom has its drawbacks: There’s crime, pollution, and the soaring rents. Above all, there’s an uneasy sense that Crosby has lost the charm of a windswept prairie outpost where doors were never locked.
But that place had been vanishing, anyway. All things considered, an oil boom – no matter how long it lasts – seems better than nothing. “You get it while the getting’s good,” Nystuen says.
A group of North Dakota legislators have introduced legislation aimed at gutting two of the state’s most significant regulatory decisions involving oil and gas. A bill could nullify requirements to ratchet down the massive wasteful flaring of natural gas and to impose standards to make crude oil less volatile before shipment by rail. It also would risk forfeiting $112 million in revenues during a two-year budget period. The question is why?
House Bill 1187, whose primary sponsor is Rep. Keith Kempenich, R-Bowman, is a naked attempt by a handful of legislators to override the executive function of the North Dakota Industrial Commission, comprised of the governor, attorney general and agriculture commissioner, all elected by voters statewide. Members of the Industrial Commission — after lengthy consideration and input from industry and the public — imposed regulations that will force industry to curb the massive, wasteful flaring of natural gas and to make crude oil less explosive.
Kempenich, in trying to justify his sweeping bid to weaken executive authority, complains that the Legislature was “left out of the loop” in decisions that are squarely before the North Dakota Industrial Commission as ultimate overseers of oil and gas. He glibly dismissed the flaring reduction goals — standards based on lengthy testimony with considerable input from industry — as “arbitrary,” and wants to make them go through a rule-making process that would involve lawmakers.
Where is the public clamor to roll back gas flaring? Halting progress on reducing flaring would cost an estimated $18.8 million per biennium in lost revenues. The state’s top staff regulator has said reaching the next tier of flaring reduction goals will be a “real stretch,” but officials say the Industrial Commission has leeway to grant flexibility in implementing its order, if deemed reasonable.
Where is the public outcry for softening standards to reduce the volatility of explosive Bakken crude oil? Not in Casselton, which last year dodged a massive explosion after an oil train derailment near the town. The order to “condition” oil before shipment carries an estimated cost of just 10 cents per barrel. But failure by the state to make oil safer for shipment could trigger more costly federal regulations that also could deprive the state of $93 million in revenues over a two-year budget cycle.
There is, of course, no public outcry to reverse either of these orders and send them through a legislative sideshow. Instead, Kempenich and his legislative accomplices have their ears attuned to the oil industry, which wants to exploit the drop in oil prices as an excuse to roll back sound regulations. The stewardship of North Dakota’s natural resources — and especially the safety of its citizens — shouldn’t be put in jeopardy. Lawmakers should kill Kempenich’s boondoggle.
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