Are you prepared for the coming crude oil surge?

Are you prepared for the coming crude oil surge?

By David Bernal, senior solutions consultant for Allegro Development Corporation, EMEA.

The international oil industry’s current focus is on low crude oil prices and the headcount redundancies and rig shutdowns that inevitably follow. This is causing too many energy traders to scurry for cover unnecessarily and to miss out on the opportunity to make some smart money.

In the past, a downward move of 50 per cent would have meant disaster for the oil and gas industry. However, a convergence of new factors this time suggests a different view of what's happening. If you can read between the lines, you can seize your share of opportunities while prices are down and march into the next cycle well ahead of your competition.

The price is dropping but production isn’t

In spite of lower prices and enduring dire news in the markets, the fundamentals generally point to an increased need for oil. If prices go back to the $60-$70 a barrel range in the next year and stay there for a reasonable period of time, worldwide production will have to respond.

While many wells have been closed and headcount reduced, the infrastructure is still there to scale up at short notice. The recent volatility has created a much leaner breed of oil companies and, from a logistics standpoint, a multitude of options have emerged in the past five years – including rail, barge and tankers, to name a few.

In 2015, oil drilling and information technology have combined to create a perfect storm of capability and agility that will allow oil markets to respond with a speed typically only seen in the digital realm.  

Five years ago it could take as long as nine months to get oil out of the ground. Today, thanks to rapid advances in drilling and information technology, it takes about 30 days to see results. You can literally go on holiday at the start of the process and come back to a producing well. 

Consequently, the need for transport to market hasn’t dropped. Oil tankers, pipelines, rail systems and the tracking technology behind these modes have grown in sophistication. As a result, there may be no better time to be a trader – and an investor - in and within the global oil-transportation business.

The abundance of supply is placing downward pressure on prices, with supply growth outside of OPEC nations rising at the fastest rate. According to the International Energy Agency, non-OPEC countries produced 1.9 million more barrels per day in 2014 than they did a year ago, with the US leading the way at 1.1 million barrels.

So, generally speaking, production is up and, as producers become more efficient, the number of rigs required to yield the same amount of oil naturally diminishes. Rig count reductions are having little to no impact on actual production.  What is really happening is that the industry is taking advantage of this opportunity to shut down under-performing rigs.

Rigs: quality v quantity – what a difference technology can make

Technology is accelerating the capabilities in oil field production and, as time passes, advancements in pad drilling and rig mobility will only ensure more of the same, rendering the number of rig counts as a measure of industry health obsolete.

Considering advancements in the way wells are drilled today, it’s not unusual for production rates at any given site to peak early and yield faster than they did in the past. The peaks are nearly three times higher than they were just five years ago, creating enhanced production rates, even during decline, due to drilling efficiencies realised by more effective horizontal drilling and, particularly in the US, by hydraulic fracturing practices.

Clearly, the ability to locate wells that promise higher oil output, combined with the speed at which wells reach peak production, is supporting a quality versus quantity approach to the oil and gas business. These can be directly traced to improvements in technology. These advancements make it possible for oil companies to turn a profit, even at today's depressed market prices, as the cost of producing oil continues to fall in step.

Conclusion

So, how should traders and investors alike react to the media's obsession with low oil prices and industry layoffs?

In my opinion, two camps will emerge from the current industry cycle: those who curb their innovation, shrink their business and limit their trading and portfolio exposure in lock step with the price of oil, and those who take advantage of the opportunity to make a profit. The latter group will increase their IT capability and invest in the right technology to better identify opportunities and manage risks, positioning themselves for aggressive growth and profit when the cycle ultimately breaks.

Which camp do you want to be in?