The Energy Report: Summer means driving season, which is good news for oil and gas prices. U.S. Global Investors recently published an article that says Americans are driving and flying more than ever. Will energy investors who “sell in May and go away” kick themselves later, when they look at the stock charts for their favorite companies?
Brian Hicks: The summer driving season is a supportive time for crude oil. Refineries are at very high utilization levels, ramping up production of gasoline, and that creates extra demand for crude oil. We have begun to see inventories come down, which creates physical demand in the marketplace and helps offset high domestic inventories. This is a seasonally strong period for oil, which should alleviate the storage overhang heading into the summer months.
TER: Oil has been above $60/barrel ($60/bbl) recently. Do you believe we’ve hit a bottom in oil prices? What can we expect going forward if history is a guide?
BH: I think we have hit a bottom. Clearly, oil prices below $50/bbl are not sustainable. We simply can’t replace global production at that price. It is way below the marginal cost of production, which we think on a long-term basis is somewhere around $75/bbl. Even at $60/bbl, we have more upside to go to reach an equilibrium price. We have come up a ways since the lows set earlier this year. Perhaps we are entering a holding pattern before the next leg up in the back half of the year. But who knows? We are starting to see production growth decline and inventory levels receding, so we could see prices maintain these levels, or get even stronger, if declines accelerate into the summer.
TER: What are rig counts telling you?
BH: Rig counts coming down over 50% bodes very well for the price of …read more