Article Written By: Jay R. Young
Sit tight and don’t panic. We’re going to be fine. We’ve been here before. I remember front yard signs in Midland, Texas after the 1973 Oil Embargo saying “God, Please give us higher oil prices one more time. We promise not to screw it up again”. The prices were barely in the double digits for oil however, money was plentiful. Since then, we’ve seen HUGE swings in the oil and gas markets so I wouldn’t be surprised if yard signs are being produced again today because oil prices are seeing a huge dive, however, my prediction is oil will bounce back and it won’t be because of the emotional reactions Saudi Arabia and Russia took last night, poking their chests at one another over production cuts. It will be because of basic supply and demand that oil will be back to $65 per barrel by the end of the year and, a lot of people will be scratching their heads saying “Why didn’t I invest in the oil markets when prices were low?”
My prediction of where oil prices will be by the end of the year hinges on three key factors.
- Why would countries continue to sell more oil for less money? We can all understand selling more oil for more money or selling less oil for less money but to sell more oil for less money doesn’t make a lot of sense for the long term. Sunday afternoon, Saudi Arabia responded to Russia by reducing their oil prices for purchase by $6-$8 less per barrel in an attempt to get Russia to come on board with oil cuts.To better understand, let’s go back to last Friday. OPEC (led by Saudi Arabia) said we (OPEC and Russia) are going to sell 1.5 million less barrels of oil per day on the markets in the hopes of raising oil prices. What they didn’t have confirmed at this time was Russia agreeing they would go along with this cut. Russia said they weren’t interested so prices plummeted 10% on Friday. With Saudi Arabia reducing their purchase price per barrel of oil, it will begin to have an immediate on Russia’s budgets because they are currently losing approximately $4 billion a month at the moment. Hmmm. Ego vs economics?
- Oil wells decline in production. A majority of people do not realize that oil wells decline in production. Once a shale well has produced most of the frack water back, oil production declines and it could be as much as 60% in the first year. Once an oil well hits their peak oil & gas production rates, wells will decline as the bottom hole pressure decreases. They will hit their peak or production within the first couple of months and decline afterwards.
- Rig count is down 25%. The reason the United States is the #1 oil producer in the world is because of the number of rigs drilling for oil and gas. This is the largest driver of increased oil production and since rig count is coming down, you will see production come down. There are 300 less rigs drilling for oil and gas as of today than there was one year ago and the rig count will continue to go down this year because the capital markets are drying up.
The reason the United States has surpassed Saudi Arabia and Russia as the largest producer of oil in the world is because of shale wells in the major basins (Permian, Eagle Ford and Bakken). As mentioned, these shale wells decline in production within the first year they are drilled and, with less rigs drilling, that is a double whammy we will have to endure by the end of this year, however you will see production coming down in all of the major U.S. basins which will drive prices back up.
When we see prices going up (and they will), by the end of the year, those in the Midland/Odessa communities will be pulling their yard signs up as Texas continues to drill for oil and gas and prices rebound.