Global crude prices may have bottomed out, the International Energy Agency said Friday, with falling production suggesting better days are ahead for the world oil market after 21 turbulent months.
The projection comes as welcome news to America’s beleaguered oil companies, which have been slashing capital budgets, cutting payrolls and stacking rigs in hopes of surviving the worst bust in at least three decades. Baker Hughes reported Friday that the U.S. rig count last week hit the lowest level on record.
The IEA’s upbeat outlook follows a sustained rally in crude prices. West Texas Intermediate, the American oil benchmark, is up 47 percent since hitting a low of roughly $26 a barrel on Feb. 11. American crude ended this week at $38.39.
“For prices there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance,” the IEA wrote in its monthly oil report. “It is clear that the current direction of travel is the correct one, although with a long way to go.”
Indeed, analysts said they did not anticipate a quick resumption of drilling in Wyoming this year. Companies will want to see a sustained improvement in pricing before committing to new drilling programs.
Firms are also more likely to return to fields in Colorado, North Dakota and Texas, which boast lower production costs and higher output, before beginning work again in the Cowboy State, they said.
Wyoming crude prices are also trading at a significant discount compared with WTI, as they often do. Wyoming sweet crude finished Friday at $28.09 a barrel. The state had four oil rigs and five natural gas rigs for the week of March 4, according to Baker Hughes.
“A few years down the line there are reasons to be optimistic,” said Chuck Mason, a professor of petroleum economics at the University of Wyoming. “I’d be surprised if we didn’t have a renaissance in drilling by the end of this decade.”
The IEA’s optimistic forecast stems from evidence suggesting global production is finally falling after months of bulging surpluses.
Production from the Organization of Petroleum Exporting Countries decreased by 90,000 barrels a day in February. The decreases were largely the result of production disruptions in Nigeria, Iraq and the United Arab Emirates.
Iranian output also fell far short of initial projections, coming in at 220,000 barrels a day. That was below the 500,000 daily barrels Iranian leaders had expected.
And the IEA revised its 2016 estimate for the decline in non-OPEC production, from 600,000 barrels a day in its January report to 750,000 barrels a day in its February edition. U.S output alone is anticipated to decline by 530,000 barrels a day in 2016, the IEA said.
“The damage done with the price crash brought global producers to their knees, and they can’t keep doing what they’re doing,” said Phil Flynn, an analyst at the Price Futures Group in Chicago.
Producers are unlikely to repeat the mistake of last summer, he said, when companies brought on wells after a brief increase in price. Small firms have neither the staff nor cash to bring new wells online while larger companies will likely wait for prices to show continued strength before opening their wallets again.
“There is going to be more trepidation and less capital to do it,” Flynn said. He predicted prices would stabilize by the end of the year.
Storm clouds nevertheless continue to loom. Last year’s crude rally was halted on poor economic news out of Europe and China. The IEA forecast global crude demand will increase by 1.2 million barrels a day in 2016.
However, more dismal economic news from China or a vote by the United Kingdom to leave the European Union could scuttle growth projections in Asia and Europe, analysts said.
Peter Wold, who leads two Casper-based oil companies, reflected the caution of many producers. A return to $60 oil would likely see a resumption of activity in Wyoming’s Powder River Basin, he said.
But Wold added, “It’s so dependent on circumstances and what the economic prospects are. You’re not going to do it with the way (crude’s) been bouncing around here.”
“A few years down the line there are reasons to be optimistic. I’d be surprised if we didn’t have a renaissance in drilling by the end of this decade.” — Chuck Mason, a professor of petroleum economics at the University of Wyoming