Wednesday, January 21, 2015
RBN Energy:
Pricing during the oil price slump, part 3:
CME NYMEX crude oil prices were down again yesterday – with the West
Texas Intermediate (WTI) contract closing at $46.39 down $2.30 over the
holiday weekend and over 55% lower than its high 7 months ago in June
2014. Some are billing the free fall in crude prices as a showdown
between U.S. shale producers and OPEC. That is because OPEC has
apparently decided not to cut production to prop up prices in an over
supplied market in hopes that lower prices would squeeze out U.S. shale
producers. If that was the strategy then it isn’t working so far. Today
we review crude producer plans for 2015 and find lower capital
expenditure budgets and cuts in rig deployment contrast with expanded
production.
Yesterday we posted Part 2
in our series on producer breakevens and drilling economics in which we
explained that despite the price crash, we expect production to
continue increasing in the short term and provided four reasons why. The
first of those reasons is the theme of today’s blog, namely that
producers are cutting back drilling, but the rigs that are left are
focused on their highest yield “sweet spots”, the best, largest
producing opportunities. Producers are cutting their budgets and
reducing rig counts but still hope to maximize production to increase
cash flow to pay down debt and finance new production.
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