A report from the International Energy Agency indicated current pressures on the oil market will continue for much of 2015, however, prices will begin to slowly rise in the second half of the year. Far from reaching their 2014 apex of more than $100 a barrel, the report suggested oil companies can expect a normalization closer to $70 or $80.
The main inhibitor of an oil rebound is the large supply glut around the world. Because many countries decided to maintain production levels in the past six months, despite slumping prices, an oversupply of oil has created less incentive to continue drilling at such high levels in the future. However, U.S. drillers have already showed signs of cutting back their 2015 plans due to minimal profits.
U.S. companies reduced their budgets and even halted production on new wells, causing the total number of drilling rigs to experience their sharpest drop in six years for the week ending Jan. 16, according to Fuel Fix.
“Investors are pouring in money to energy stocks in anticipation of the coming rebound.”
Analysts look toward the second and third quarters of 2015 as the point when a rebalance in the marketplace begins occurring. The main reason is due to U.S. companies scaling down their operations, which will allow prices to normalize once more. Domestic drilling will once again ramp up in the near future as well efficiency increases and profits rise due to prices of oil.
Re-fracking old wells
Research company Wood Mackenzie indicated the pressures on U.S. drillers are temporary, and many companies have several reasons to look forward to future – namely greater efficiency per well and the potential gain from refrac sites, according to RigZone.
The resurgence of fracking in the past decade enabled drillers to exploit underground shale plays. With the rig count declining and companies lacking the funds to open up new operations on wells, some are turning to refracs, mainly in gas plays. Companies heavily invested in oil, can redirect a larger portion of their business toward gas instead.
Refracs can be more than 25 percent cheaper than traditional fracking methods. By going back to previous wells and utilizing horizontal drilling to access even more gas, companies can cut down on production costs because wells are already drilled for the most part.
Stock market movement
Bloomberg Businessweek noted investors are pouring in money to energy stocks in anticipation of the coming rebound. The four largest oil exchange-traded products on the New York Stock Exchange already increased $1.1 billion in January, which means investors don’t believe oil prices will fall any further.
On the heels of the IEA report and expanded investment in oil, now could be the time for companies to look for ways to increase their operations in the near future. Rather than a full-scale redeployment of resources, U.S. drillers should make do with their current operations, but improve upon production capabilities as the market continues to turn around.
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