Energy Economy

Oil Well Completion Backlog Could Weigh on Crude Prices for Years

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Crude oil prices rose nearly 3% on Thursday as traders bid barrels higher following more reports of lower U.S. rig counts and more airstrikes against Yemeni rebels. West Texas Intermediate (WTI) crude for June delivery closed at $57.75 on the NYMEX after topping $58 briefly. Prices have pulled back to around $57.50 early Friday morning.

The pullback is likely due to a report from Bloomberg Thursday that claimed more than 4,700 drilled wells in the United States have not been completed while oil producers wait for prices to rise again. More than 1,500 wells in the Permian Basin, 1,250 wells in the Eagle Ford and 632 wells in the Bakken have been drilled but not completed.

The backlog in completions, which producers call the fracklog, is keeping 322,000 barrels a day stored underground, according to Bloomberg. That equals about the amount of oil currently being produced by Libya.

We noted earlier this month that producers are holding back production on the expectation that cuts in drilling and completions now being implemented will result in prices rising to levels that will once again produce profits. That level is around $60 to $65 a barrel.

Futures traders have been increasing their long positions for several weeks now, anticipating price increases. What is unknown is how quickly producers can turn idle wells into flowing moneymakers.

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Once those wells begin flowing, the price of crude may drop again as producers that have waited for prices to rise all jump in again at the same time. Even the threat of that may keep prices down.

Occidental Petroleum Corp. (NYSE: OXY), the largest leaseholder in the Permian Basin, traded down about 0.7% for the year to date, as of Thursday’s close. The stock hit a bottom of down nearly 11% on March 19 and has staged a comeback since then. At an industry conference in Houston this week, CEO Stephen Chazen said that readily available capital and demand from private equity firms for investment opportunities could extend the low-price period.

Scott Sheffield, CEO of Pioneer Natural Resources Inc. (NYSE: PXD), another large Permian Basin producer, said his company is planning on prices in the low $60s range for the next five years. With private equity capital in the range of $80 billion to $100 billion available, Sheffield said, “It gives people firepower to put it back into shale.” Pioneer’s stock is up 1.3% year-to-date, but it has not experienced the same big swings that Occidental shares have.

Producers are also concerned about how quickly Iranian oil could return to the international market, if and when an agreement can be reached. Many producers have argued for the United States to lift its 40-year ban on oil exports, arguing that it makes no sense to let Iran back into the global market at the expense of U.S. producers.

On Thursday at the conference in Houston, U.S. Energy Secretary Ernest Moniz said:

In a situation where we still import 7 million barrels of crude oil per day, I don’t think an overly compelling argument has been made [for lifting the export ban] on the basis of pragmatic economics.

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U.S. oil imports will not disappear anytime soon because refiners spent billions of dollars in the years between about 2004 and 2010 upgrading their plants to process the heavier crudes from exporting countries like Mexico and Venezuela. For their part, the producers argue that exporting the light crudes from U.S. shale plays can offset the heavy crude imports.

That is true enough, but the effect is to shift the profits from refiners to producers. Needless to say, refiners disagree and claim they can make changes to process the lighter crudes.

All this adds up to hopes for higher prices for U.S. crude producers, but a variety of reasons that the increases may not occur any time soon. The other thing to keep in mind is that the current situation in the oil patch is unique and no one can claim that one solution is better than any other.