Even if oil prices were to reach an unheard of $100/bbl, the price spike wouldn’t have much of an effect on domestic natural gas production or drilling, analysts with Standard & Poor’s Ratings Direct (S&P) said in a report issued on Monday.
The recent run-up in oil prices — they’ve risen $8-plus in just the past three weeks — led a trio of S&P analysts to consider the “what ifs” for the oil and natural gas industry. The analysts cautioned that they are not forecasting $100 oil, but they noted the rising prices and a fear of potential supply disruptions “real or imagined” have created an environment where triple-digit prices in the near term are not unimaginable.
“With global spare productive capacity stretched incredibly thin at about 1 million bbl/d, maybe less, and continued healthy demand growth, the reality is that any number of significant events (e.g., a major hurricane in the Gulf of Mexico, a catastrophic act of terrorism against a major oil production or loading facility, or political or military actions that severely reduce or shut down production from a large producing nation) could cause such a spike,” said the S&P analysts John Thieroff, Philip Baggaley and Kyle Loughlin.
But the analysts don’t expect an oil price spike to have an effect on domestic drilling. “In the U.S., drilling is heavily weighed toward natural gas, with less than 20% of working rigs currently drilling for oil. In addition, rig availability is an issue because few idle rigs are available.” Drillers would benefit from the higher prices, but if prices rose too quickly, it would “probably” take several months for rig companies to increase dayrates to reflect the higher prices. “Conversely, producers would likely enjoy particularly fat margins from a quick run-up in oil prices until drilling and service companies could pass along increases.
“Moreover, the domestic drilling market is gas-dominated, and most of the onshore oil producing areas in the U.S. are very mature lack of prospectivity in many of the domestic natural gas basins. Because of this, in the current environment of rising oil prices and steady-to-falling natural gas prices, drilling and service companies aren’t likely to reap the full benefit.”
Regardless, gas prices would be relatively unaffected by a spike in oil.
“Based on current spot prices, oil is about 13 times the price of natural gas. Although oil and natural gas have some interchangeability, primarily among industrial users, gas has much less of an effect on oil prices than oil does on gas prices. The fundamentals of the oil market are global. In addition to supply and demand, a host of geopolitical factors materially affect oil prices. Reduced demand in the U.S. doesn’t necessarily affect global prices. In the current environment, with strong global demand for oil and U.S. natural gas inventories extremely high, it is unlikely that any incremental fuel switching that remains available would have a meaningful influence on oil prices.”
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