The Energy Report: The prices of West Texas Intermediate (WTI) and Brent have recently rebounded to about $60 per barrel ($60/bbl) and $65/bbl, respectively. Where do you see them going for the rest of the year?
Angelos Damaskos: The oil industry expects oil to recover to $75/bbl in the near term because this is the global marginal cost of production. The longer oil trades below that price level, we lose supply not only from the North American shale industry, but also from the longer-term producing projects: the Canadian tar sands and the Brazilian offshore basins.
The oil price has recovered by 20–25% from January’s lows but remains 50% lower than last year’s highs. As a result, there has been a dramatic drop in income and earnings, which has been met with big cutbacks in capital expenditure (capex) and development drilling. The length of time oil trades below $75/bbl is a clue to how strong the recovery might be once a supply-demand balance is again achieved.
TER: With regard to shale oil, some believe that the oil price collapse has broken that industry for the foreseeable future. Do you agree?
AD: I do not. Shale oil technology has advanced tremendously over the last few years, which is why production has advanced so rapidly. It is now far easier to map and understand the geotechnical characteristics of shale reserves. It’s purely a matter of spending the capex necessary to develop as many wells as possible to increase production. The minute oil prices recover to $70–75/bbl, or perhaps a little higher, shale drilling will recommence almost immediately.
TER: Some blame the oil price collapse on lack of demand. How much do we know about oil consumption?
AD: It’s not clear what caused the collapse. We believe it might have been a demand shock resulting from …read more