What Will Recovery Look Like?

 

Since flirting in the upper $20s earlier this year, oil prices have seen a slight rebound in recent months. Increasingly, operators are cautiously bullish, exploring fresh plays and testing the waters with new drilling. Is this optimism warranted? It may be. Waning domestic inventories and talk of an OPEC production cap may signal brighter days ahead, but only time will tell if prices can spur renewed activity in the E&P space.

As operators cross their fingers for continued positive momentum, it is important to understand what factors will play into a sustained recovery. Let’s take a look at some of the short-term indicators that will affect ongoing oil prices.

 

Inventory:

It’s no secret. The key to recovery in the energy sector is renewed activity in the E&P space—upstream firms need to produce new oil. And in a commodities market, this activity is dictated by demand. Only when on-hand inventories are not sufficient to meet future demand will prices adjust upward.

 

Regulations and government intervention:

Oil and gas isn’t just controlled by simple supply and demand. Government intervention can have a dramatic effect on energy markets, and stringent regulations can slow—or even stop—oil production.

The most pressing regulatory threat to domestic production comes in the form of restrictions on hydraulic fracturing. Colorado and several other states have introduced legislation that would limit the ability of operators to use the technique. Keep an eye on the ballots this election cycle: If fracking regulations do not pass, E&P operators will have one important obstacle out of the way.

 

Demand and Economic Performance:

Perhaps you’ve heard it said: A rising tide lifts all ships. This old adage is most certainly true in the energy sector. Economic growth in Asia and elsewhere may signal a significant increase in demand—and good news for American producers.

 

OPEC:

When OPEC opened the spigot and flooded markets in 2014, the cartel hoped to deter outside production. The measure may have been ill-advised, however. Cheap oil decimated the profits of cartel nations—many of whom rely heavily on oil revenues.

Many U.S. operators filed for bankruptcy, but the majority of firms have outlasted the worst of the storm. It now appears that a production cap will be forthcoming. Current domestic breakevens sit at $51 – $67/barrel, a target that will likely be met as inventories continue to wane.

 

The starting gun will fire as soon as operators can hit their breakevens—and those with the lowest expenses will be first off the starting blocks. American operators need strategic partners and midstream consultants that can keep overhead down. That’s where we come in: One Cypress Energy’s competitive crude oil marketing services can help you maximize your resources, minimize your expenses, and take the stress out of your crude oil sales.

Contact us today and find out how One Cypress Energy can help you navigate a changing energy market.