Oil Prices: Expect The 2nd Half Of 2017 To Look A Lot Like 2H 2016

So here we are, right where I expected things to be last December, when I wrote my projections for 2017:  U.S. oil and gas drillers have activated almost 300 additional drilling rigs during the year’s first six months, U.S. oil production has soared as a result, offsetting much of the cuts implemented by OPEC and Russia, and the result is that the U.S. industry has drilled itself right back into a lower price situation , with the price for WTI hovering in the $44-$45/bbl range.

This very predictable response by the U.S. industry to the higher oil prices at the end of 2016 has effectively slowed the ability of the OPEC/Russia alliance to close the global supply glut, causing commodity traders to lose confidence.  Saudi Arabia is responding by significantly reducing its exports to the U.S., in the hopes of creating a few weeks of large storage draws, which they hope will restore investor confidence and cause the price to tick upwards.  They may or may not be correct – we’ll just have to wait and see.

In the meantime, U.S. rig additions have begun slowing somewhat over the past few weeks – although the week of June 10 – June 16 became the 22nd straight week of rising rig counts – as the industry begins to scale back its drilling plans for the 2nd half of the year in response to the lower price.  This again is no surprise to anyone who understands how the U.S. industry works, as I wrote in December:

  • But prices may rebound the second half of the year – Of course, a lower oil price will lead many producers to reduce drilling budgets during their mid-year reviews, and rig counts will cease to rise, and possibly even fall off somewhat.  With OPEC still at least making some effort to control production levels and global demand still steadily rising, a leveling-off of U.S. production should cause the market to rebound.

 

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