Oil prices rose in late September after a summer of relative stability and ended the third quarter up almost $12 per barrel for the year. Just a few weeks later, as swelling U.S. production set new records, domestic crude prices slid off four-year highs and appeared to found a new level. Prices settled at $72.25 bbl. for West Texas Intermediate to begin the last week in September, up from $60.37 at the start of the year. Production reached 11 million b/d in midSeptember, shattering the record for domestic production, reported the Energy Information Administration. In the meantime, U.S. refineries boosted production of gasoline and diesel to 15.68 million b/d in midSeptember, up by 1.21 million b/d from a year earlier. Strong demand for motor fuels and increased exports to Latin American kept refineries operating at 95 percent capacity for most of the second and third quarters, according to EIA.

Oil market analysts attributed the rise in crude prices to lower production from OPEC and the potential of loss of up to up to 1.5 million b/d of crude due to US sanctions on Iran. In late September, however, reports of a sudden rise in oil production in Russia were seen as tempering global oil markets.

In October, Saudi Arabia indicated that it has also increased production and could add 1.3 million b/d within 3 months.

Predicting prices in the mid- to long-term, however, is difficult as factors ranging from geopolitical unrest to volatile international capital markets, remain unsettled.

What is clear is the strength of the domestic recovery through the first nine months of the year. In August, when production topped 10.9 million b/d, it marked the milestone where U.S. crude oil output surpassed that of Saudi Arabia prior to that nation’s subsequent production increase. Assessments of the health of the North American oil and gas industry show that the industry’s recovery from the downturn is in full swing and companies are reaping the benefits of new technologies and efficiencies born during lean times two years ago. But, the industry is also facing new challenges and new market conditions.

spwm usoilandgasOperators are now expanding production on reserves booked months or years ago. Likewise, improved cash flows help companies stay ahead of rising expenses and most are operating with lighter debt loads. In fact, a recent survey of more than 100 operating companies by the Department of Energy in September showed debt levels down to 10-year lows.

 

 

HEADWINDS FORMING

According to the American Petroleum Institute’s Third Quarter Report, the industry has made “remarkable progress so far in 2018, but headwinds are building.”

“Lower consensus growth expectations, rising price inflation, higher interest rates, trade barriers and disputes, and financial market uncertainties” forecast rough sailing ahead, the API report noted.

Of the many bright spots for domestic oil producers, the opening of export markets in early 2016 was one of the brightest. However, trade disputes triggered by the Trump administration are cited in the API report as causing a sharp decline in exports in July and August.

spwm api“Placing constraints on exports of American-made energy works against America’s energy future,” said API Chief Economist Dean Foreman.

“While the picture is still a bit muddied, it seems to be getting clearer—the trade war appears to be limiting the domestic access to crude export markets. As we produce more energy here at home, the U.S. needs markets for its products. There’s no question that this summer’s 1.6 million b/d increase in petroleum net imports, which undid a full year’s worth progress, is a setback to our goal of energy dominance,” Foreman observed.

The surge in domestic production has resulted in fundamental changes in global oil markets now that the U.S. is a leading oil producer. However, new questions have been raised about the capital foundations underpinning the industry’s growth.

In September, an op-ed in the New York Times warned that private equity holds about one third of all capital invested in oil development. As investors continue to buy companies based on acreage rather than multiples of profits, the oil expansion could produce another “dot-com bubble.”

Despite the many challenges facing the oil and gas industry, most oil market observers remain optimistic the industry will continue to benefit from new efficiencies and strong demand.