Commodities
Why do big companies refuse to produce more oil and gas production?
Major companies are refusing to produce more oil and gas production. The energy giants are still reeling from the recent collapse in oil prices and are unwilling to take risks.
Now that oil prices are much higher than $100/bbl, you can hear the question on every corner: why don’t the world’s energy giants take advantage of such a good opportunity and drill huge numbers of new wells to make billions on high prices?
The World Community is Asking OPEC to Produce More Oil
There are many reasons for this strange behavior, but analysts generally name three. Firstly, oil companies have not yet fully digested the trillion-dollar losses of the last decade. Second, expensive gasoline does not yet mean high profits for oil companies to justify the development of new fields.
And third, the growing popularity of electric vehicles makes most oil companies satisfied with the bird in the hand in the form of already developed wells, which now bring good profits; rather than chasing the crane in the sky, i.e., super profits, the hunt for which carries huge risks. Will Saudi Arabia produce more oil?
There is no definite answer. The first reason – the losses of the past years are mostly psychological in nature, but this does not make them any less strong. Because of the collapse in the oil markets in the middle of the last decade, oil companies lost over $1 trillion. For example, among the four oil giants covering all areas of the oil industry, from exploration of new fields to equipment and well maintenance: Royal Dutch Shell, Occidental Petroleum, Transocean and Halliburton, only one company – Shell – managed to make money rather than incur billions of dollars in losses in 2014-18.
It also answers the question of why Canada doesn’t produce more oil. The events of 2014-20 taught oil workers to be cautious and to always remember that high prices can collapse at any moment, and that a company that forgot about this and invested all its money in exploration and expansion of production is likely to go bankrupt.
Life has taught oil companies that it is safer to be conservative regarding costs, i.e. not to invest everything they have, no matter how much they might want to, in exploration and production. That’s why many oil companies have such low budgets for these items, despite the ideal market situation.
It might seem that you can forget about caution when prices are at, say, $120 per barrel, but the fact is that the oil markets are not ruled by arithmetic, but rather by higher mathematics.
For example, the oil markets are now in a situation described by the English word “backwardation,” when oil prices are currently higher than futures prices. In deciding whether to invest in new wells, an oil company director should analyze not the current oil prices. but the prices of the time when the first barrels of oil will be extracted from the new wells. If, for example, we are talking about the end of 2023, we can expect to be able to sell it for a maximum of $78 a barrel. That’s well below $97.5 a barrel on the spot market. Earlier, producers began to produce more oil as Iran’s supply fell.
If you add conservative thinking to backwardness, it becomes more or less clear why new wells are not growing like mushrooms after the rain and why oilmen and investors are in no hurry to “bury” big money in the ground.
Situation in the oil markets is slowly changing
Despite the above-mentioned reasons, the situation in the oil markets is slowly changing. The number of working rigs has now reached a two-year high, and in the next few months it may reach pre-pandemic levels.
Production is growing very slowly, but still. But it is not growing fast enough if there is a collapse in oil prices. This means that the cash flows that oil companies are generating at the moment should continue indefinitely until demand drops.
Contributing to oil companies’ reluctance to take risks and invest in new production are electric cars. Last year, one in 12 new cars sold was electric (8.6%). Data for the first six months of 2022 suggest that this figure could grow by about 50%.
Naturally, such rapid development of electric cars cannot help but get on the nerves, and confidence of oil companies. Few people want to increase production when they realize that the main consumer of oil, i.e. cars, is increasingly switching to electricity.
By Nicole Jao
NEW YORK (Reuters) -Oil prices settled lower on Friday, and posted their steepest weekly loss in three months as investors weighed weak U.S. jobs data and possible timing of a Federal Reserve interest rate cut.
futures for July settled 71 cents lower, or 0.85%, to $82.96 a barrel. U.S. West Texas Intermediate crude for June fell 84 cents, or 1.06%, to $78.11 a barrel.
Investors were concerned that higher-for-longer borrowing costs would curb economic growth in the U.S., the world’s leading oil consumer, after the Federal Reserve decided this week to hold interest rates steady.
For the week, Brent declined more than 7%, while WTI fell 6.8%.
U.S. job growth slowed more than expected in April and the annual wage gain cooled, data showed on Friday, prompting traders to raise bets that the U.S. central bank will deliver its first interest rate cut this year in September.
“The economy is slowing a little bit,” said Tim Snyder, economist at Matador Economics. “But (the data) gives a path forward for the Fed to have at least one rate cut this year,” he said.
The Fed held rates steady this week and flagged high inflation readings that could delay rate cuts. Higher rates typically weigh on the economy and can reduce oil demand.
The market is repricing the expected timing of possible rate cuts after the release of softer-than-expected monthly jobs data, said Giovanni Staunovo, an analyst at UBS.
U.S. energy companies this week cut the number of oil and rigs operating for a second week in a row, to the lowest since January 2022, Baker Hughes said in its closely followed report on Friday.
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The oil and gas rig count, an early indicator of future output, fell by eight to 605 in the week to May 3, in the biggest weekly decline since September 2023. The number of oil rigs fell seven to 499 this week, in the biggest weekly drop since November 2023. [RIG/U]
Geopolitical risk premiums due to the Israel-Hamas war have faded as the two sides consider a temporary ceasefire and hold talks with international mediators.
Further ahead, the next meeting of OPEC+ oil producers – members of the Organization of the Petroleum Exporting Countries and allies including Russia – is set for June 1.
Three sources from the OPEC+ group said it could extend its voluntary oil output cuts beyond June if oil demand does not increase.
Money managers cut their net long futures and options positions in the week to April 30, the U.S. Commodity Futures Trading Commission (CFTC) said.
Investing.com– Oil prices fell Friday, to remain on course for steep losses this week even as the dollar weakened following a weaker-than-expected U.S. jobs report, while data pointing to rising U.S. supplies reined in bets for tighter markets.
At 14:10 ET (18:10 GMT), fell 0.6% to $84.20 a barrel, while gained 0.6% to $79.44 a barrel. Oil prices are trading close to their weakest levels in seven weeks, and were set to lose between 5% and 6% this week.
Weaker dollar fails to turn negative tide as crude set for hefty weekly losses
The dollar fell as rate-cut hopes were boosted by data showing tight U.S. labor market is cooling after job gains and wages fell in April.
“Our forecast remains for three 25bp cuts this year starting in July, but have highlighted the path to cut in July has gotten narrower following the reinflation in 1Q24 data,” Morgan Stanley said in a Friday note.
As oil is priced in dollar, a weaker dollar tends to boost demand for non-dollar investors. Despite the dollar weakness was of little comfort to oil prices as most of the damage occurred earlier this week following an unexpected build in U.S. and data showing increased U.S. production.
This was coupled with easing fears of supply disruptions in the Middle East, as Israel and Hamas continued negotiations over a potential ceasefire.
Baker Hughes rig count dips below 500
Oilfield services firm Baker Hughes Co (NYSE:BKR) reported its weekly U.S. rig count, a leading indicator of future production, rose fell 499 from 506, pointing to weaker drilling activity even as the demand-heavy U.S. summer driving season approach.
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But the fall in rigs just as domestic output is rising suggest that drillers are squeezing more out of existing wells.
OPEC+ could extend production cuts
Still, crude found some relief on Friday from a softer , as the greenback retreated in anticipation of the nonfarm payrolls data.
Also helping the tone was a report from Reuters that the Organization of Petroleum Exporting Countries and allies, a group known as OPEC+, could potentially maintain their current run of 2.2 million barrels per day of production cuts beyond the end-June deadline, especially if demand does not pick up.
But cartel members are yet to begin formal talks over the matter. Still, extended production cuts by the cartel could herald tighter markets later in 2024.
Adnoc, the UAE’s national oil company, has increased its production capacity by 200,000 barrels per day to 4.85 million b/d, leaving the producer with a spare capacity above 1.7m b/d, after producing a little over 3.1m b/d in April.
“This could see the UAE push for a higher baseline when OPEC+ discusses its output policy for the second half of 2024,” ING added.
(Peter Nurse, Ambar Warrick contributed to this article.)
By Nicole Jao
NEW YORK (Reuters) -Oil prices settled lower on Friday, and posted their steepest weekly loss in three months as investors weighed weak U.S. jobs data and possible timing of a Federal Reserve interest rate cut.
futures for July settled 71 cents lower, or 0.85%, to $82.96 a barrel. U.S. West Texas Intermediate crude for June fell 84 cents, or 1.06%, to $78.11 a barrel.
Investors were concerned that higher-for-longer borrowing costs would curb economic growth in the U.S., the world’s leading oil consumer, after the Federal Reserve decided this week to hold interest rates steady.
For the week, Brent declined more than 7%, while WTI fell 6.8%.
U.S. job growth slowed more than expected in April and the annual wage gain cooled, data showed on Friday, prompting traders to raise bets that the U.S. central bank will deliver its first interest rate cut this year in September.
“The economy is slowing a little bit,” said Tim Snyder, economist at Matador Economics. “But (the data) gives a path forward for the Fed to have at least one rate cut this year,” he said.
The Fed held rates steady this week and flagged high inflation readings that could delay rate cuts. Higher rates typically weigh on the economy and can reduce oil demand.
The market is repricing the expected timing of possible rate cuts after the release of softer-than-expected monthly jobs data, said Giovanni Staunovo, an analyst at UBS.
U.S. energy companies this week cut the number of oil and rigs operating for a second week in a row, to the lowest since January 2022, Baker Hughes said in its closely followed report on Friday.
remove ads
.
The oil and gas rig count, an early indicator of future output, fell by eight to 605 in the week to May 3, in the biggest weekly decline since September 2023. The number of oil rigs fell seven to 499 this week, in the biggest weekly drop since November 2023. [RIG/U]
Geopolitical risk premiums due to the Israel-Hamas war have faded as the two sides consider a temporary ceasefire and hold talks with international mediators.
Further ahead, the next meeting of OPEC+ oil producers – members of the Organization of the Petroleum Exporting Countries and allies including Russia – is set for June 1.
Three sources from the OPEC+ group said it could extend its voluntary oil output cuts beyond June if oil demand does not increase.
Money managers cut their net long futures and options positions in the week to April 30, the U.S. Commodity Futures Trading Commission (CFTC) said.
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