November 2016 SEE Monthly UpdatePermian Basin Part I, Inventories, Election
Large inventories of crude oil worldwide and few credible promises to cut future production have put downward pressure on oil price. The November 11, 2016 spot price close for West Texas Intermediate at Cushing was $43.41/barrel.
In particular, Saudi Arabia successfully auctioned its country bonds, reducing the need to increase revenues solely via higher oil prices. Other OPEC members are unwilling to cut production, an endemic problem for cartels. In the US, rig count has eased upward. While production is down from its all-time high, it hasn’t fallen as far or fast as was expected; note particularly that Permian (West Texas/Eastern New Mexico) production is stable at two million barrels per day.
In the oil and gas world, oil projects remain more economic. Of the plays, the Permian is the most economic. Its stacked pay—productive zones numbering from six to twelve—fits well with improved technology, rig efficiency, and existing pipeline infrastructure. Indeed, the Permian is so attractive that lease acquisition there, while nominally several times other basins at $40,000+ an acre, is actually less expensive on a $/recoverable barrel basis because of the stacked pay.
The ability to export crude oil offers a “relief valve,” so that we now see West Texas Intermediate (WTI) prices equivalent to Brent less the $2/barrel cost of pipelining to the US Gulf Coast. This contrasts to much wider WTI-Brent differentials earlier.
While it would be as much folly to predict the petroleum industry consequences of the US presidential election as it was to predict the outcome of the election itself, clearly the direction will be toward less burdensome regulation with more cost-benefit justification required for both new and existing regulations. Likely election beneficiaries include midstream and downstream—pipelines and refineries.The subscriber section looks at some of the many dozens of companies operating in the Permian Basin. For more information, log in now or, if you are not already a subscriber, subscribe now.
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