The Energy Report: Oil prices continued to fall last month. What happened? Is this a problem of too much shale oil, too little demand from China or something else entirely?
Keith Schaefer: I think it has a lot to do with increasing shale production in the U.S. Production resiliency has surprised everyone. It surprised investors and lenders. It certainly surprised the Saudis. And it surprised the long oil speculators. We saw that nice pop back up to $60 a barrel ($60/bbl) after the initial collapse to $40/bbl in December/January. But as the rig count dropped and oil production failed to decrease, the longs have gotten discouraged.
The Street has realized that the Saudis are going to keep putting the pedal to the metal, Canadian heavy oil production cannot be turned off, and debt-laden producers in the States aren’t going to shut down existing production. We will continue to have excess supply for the foreseeable future.
TER: If rig counts are not a good indicator of future production, what signs will signal we are headed for a move up to sustainable prices?
KS: Rig counts have not been an indicator yet. Producers just keep finding new efficiencies, new technologies, new savings on service costs that allow them to continue pulling oil and gas out of the ground. The market has lost confidence in the U.S. Energy Information Administration (EIA) and the Paris-based International Energy Administration. Those numbers don’t carry the weight they used to carry. In the end, we might just be waiting for time and recounts. [Note: Since this interview was conducted, the EIA has come out with a new methodology for oil production reporting, and revised production in the U.S. downward by 100,000 barrels per day (bbl/d).]
TER: That explains the uncertainty on the supply side. What factors are impacting oil prices …read more