Oil & Gas Market Trends
Date April 2019
- Oil prices peaked at a three-year high of $75.37 in early October 2018, prior to beginning a period of uncertainty and decline with a low of $44.48 in late December 2018. Crude pricing has recovered since December, stabilizing in the upper $55-per barrel range
- North American rig count was down 2.9% as of March 29, 2019, over the same period last year
- U.S. crude oil production is up approximately 30% since the beginning of 2018 and up 140% since 2008
- In December 2018, the U.S. exported more oil and fuel than it imported for the first time in 75 years
Gordon Brothers by the numbers
U.S. exports high despite decrease to China: The recent trade war has put a major damper on U.S. oil exports to China. Although China has not imposed a tariff on U.S. crude oil, Chinese purchases for the last quarter of 2018 were reduced to a trickle. Through the first half of 2018, China had accounted for over 20 percent of all U.S. crude exports, according to information published by Forbes. Exports of crude oil to China dropped dramatically as a result of the trade tensions, falling from over 20,000 barrels in June 2018 to less than 3,000 on average from August through November.
China became a major purchaser of U.S. crude after the Obama administration lifted a 40-year ban on exporting crude oil in 2015. Subsequently, China surpassed Canada as the top importer of American oil in 2018. Despite the slowdown of exports in late 2018, bilateral trade talks between the United States and China have continued. Sparking optimism, the first new shipment of American oil in recent weeks was delivered on March 1, 2019, according to Chinese customs data. South Korea and India, which now purchase one-third of U.S crude exports, have helped close the gap in volume, with Canada making up approximately 20 percent.
Despite the slowdown in exports to China, in December 2018, the United States exported more oil and fuel than it imported for the first time in 75 years based on information published by the New York Times. Additionally, domestic production has more than doubled over the past 10 years as technological improvements have significantly increased the efficiency of extraction of oil from shale formations. However, the rise in exports has not reduced the U.S. trade deficit as the Trump administration had hoped, and it remains to be seen what will come of ongoing U.S-China trade negotiations, driving ongoing uncertainty in the sector.
Active rig count plateau: The North American market saw swings in rig activity throughout 2018. However, as a result of the decline in the price of crude oil, among other factors, drill counts have retreated somewhat in 2019. Baker Hughes reported that the North American rotary rig count as of March 29, 2019, was 1,094. This takes into account rigs in the United States, Canada, and the Gulf of Mexico. In the aggregate, rigs drilling for oil are down 2.9 percent from the same period one year ago. As of our publication date, there were 33 fewer North American rigs drilling for oil than for the same period in 2018.
When broken out by basin, fluctuations in rig count were more pronounced, with the biggest unit decrease occurring in the Cana Woodford basin with 14 fewer rigs, and the largest increase in the Permian basin with 11 more rigs in operation over the same period last year.
Level of drilled but not completed wells increasing: According to information from the U.S. Energy Information Administration, as of March 2019, wells that had been drilled but not completed totaled over 8,500 units, which is part of a steady increase that began in late 2016. The drilling of wells without completion has been a trend since early 2014, with the lowest point in the last three years (November 2016) still surpassing 5,200 units. Low oil prices have forced exploration and production companies to hold off on completion in hopes of future price increases. This poses a threat to the recovery of oil prices, as an increase in new supply will drive prices lower, thus delaying the recovery process.
Energy service companies could see an increase in demand should exploration companies shift focus from drilling to completion of the uncompleted well inventories. This could increase inflation relating to the cost of frac sand, completion services, and other services. Once these backlog wells are completed, they could flood the market, increasing volatility and putting a downward spin on oil prices.
Demand for sand: With the current number of drilled uncompleted wells over 8,500, ancillary service companies could see an increase in utilization and activity. This will precipitate a continuing demand for sand. Oil companies have recently begun to substitute high-quality sand from Wisconsin and surrounding areas with lower-quality sand from Texas and other southern regions; though the sand is of a lower quality, large quantities are readily available without the standard high freight costs.
Along with sand, the oil country tubular goods industry is also seeing an increased demand for drill pipe, casing, and tubing pipe. As companies continue to drill longer and wider wells, there will be a demand for more pipe inventory. It is forecast that a global demand for pipe will grow by more than six percent per year through 2020.
Current appraisal consideration: In general, values have somewhat recovered from the lows witnessed in 2016 through mid- 2017 to achieve an increased, and more stable, level of recovery. New equipment prices have stabilized. Though there have been fluctuations in crude oil prices recently, industry participants continue to maintain a cautious optimism going forward. Certain aspects of the oil industry, coil tubing and well completion/stimulation in particular, continue to realize a steady demand for both new and used equipment. Stabilized and sustained oil prices at or above the current level could mean increased demand and values across the energy spectrum.
However, declines in the price of oil could adversely affect assets directly related to exploration. Therefore, lenders with oil and gas assets in their portfolios will need to keep a watchful eye on crude oil pricing along with world factors that could influence market participants. Lenders with oil and gas assets that have not been valued during the past six months may want to consider a new appraisal. This effort may identify previously unrecognized changes in exposure and better position lenders to make appropriate decisions regarding changes in loan structures.