With North American oil production on the rise and global demand tapering, the price for a barrel of oil will inevitably follow a similar trend downward as did the price of natural gas as volumes rose, according to economist Peter Tertzakian. However, the fall won’t be as severe nor is it imminent, he said.

With oil trending in the $80 to $100 range since 2010, the incentive to producers is to grow production. “If everybody is growing production, it has the ultimate consequence to the price of the commodity. The dynamics for oil are following exactly the same playbook as natural gas. It’s a replay of the gas story.”

Tertzakian, chief economist for Calgarybased ARC Financial Corp., spoke at Hart Energy’s DUG Permian conference in Fort Worth, Texas. At present, an average annual 100,000 bbl. per day U.S. growth rate is mitigated by softened demand globally, keeping prices stable, he said.

“For this year and next, it doesn’t matter that much,” he indicated. “A hundred thousand bbl. a day will get mopped up by the market. But sustained production growth will lead to eventual price erosion.”

Still, the price of oil will be “stickier” than natural gas, he predicts, due to it being a strategic national commodity. He sees a broad price range of $60 to $100, and more likely $70 to $90 in time.

“There is a floor, and that floor is when rigs go home. The floor is a moving target; it’s the true marginal cost.”

A frenzy of investment being put into new techniques is keeping the price of oil high, he said, but as costs come down the price floor may follow. “We’re at the early innings of new technology, and a lot of upfront capital is being put into infrastructure.”

being put into infrastructure.” The lesson from natural gas, he said, is that the incremental cubic foot of gas produced doesn’t cost as much as once thought. “Four years ago, we used to say there was a floor on the price of gas because it was too expensive to bring out of the ground, and here we are today. There is a bit of naivety in the industry as to what these new technologies can do.”

Many producers anticipate the opportunity to export oil to access global oil prices, but that option may not be the panacea anticipated, Tertzakian revealed. The difference is cost efficiencies. Now, the surge in U.S. oil production is pushing out imports, primarily Mexican and Venezuelan production. “These have largely inefficient state-owned oil companies,” he said. “It’s easy to push them out. But at some point, with this kind of growth, you’re going to push up against the lowest-cost producers in the world — companies with lifting cost from conventional fields less than the price using these new techniques in North America.”

At that point, U.S. producers enter the battle for market share, which is almost always fought on price.

“When oil exports start occurring, it doesn’t mean you’re going to get the big, high price the rest of the world is getting. It means you’re going to have to compete with the other low-cost producers in the world.”

Comments