The current downturn in crude oil prices is a response to a market imbalance that was created when overall oil supply from the fracking boom exceeded demand, and the resulting contraction is probably not going to turn out like the “bust” period of the 1980s, concluded economist Karr Ingham, who presented the 2014 Texas Petro Index (TPI) for the Texas Alliance of Energy Producers Monday.
However, the recent energy boom is definitely over, Ingham noted, adding that the energy industry is not likely to enter a period of prolonged expansion for many months.
“It’s not that we may not get some moderate relief from current low prices, but prices will need to rise fairly significantly in order to begin to turn things around, and we should prepare for the possibility that that may not happen in 2015,” Ingham said at a news conference Monday.
The TPI declined to 309.5 in December, down from 312.7 in November and the October peak of 312.9, Ingham observed. From here, the TPI is likely headed for declines through most or all of 2015, and possibly into 2016. It could take as long as 18 to 24 months before energy prices begin to climb significantly higher on a routine basis, he said.
“There is every reason to believe the Texas Petro Index will lose 40 percent of its value, dropping to well below 200 from its peak of 312.9,” Ingham said. “In the 2008 to 2009 contraction, the price decline was deep but short-lived, and the TPI declined by nearly 35 percent. While it is possible the duration of price decline this time around could be short-lived as well, the fundamentals don’t quite suggest that will be the case.”
One of the curious things to come out of the data is that the number of new drilling permits continued to climb through September and October, and did not begin to fall until November, well after the monthly average crude oil price peaked at just over $100/barrel in June 2014, Ingham said.
The Texas rig count peaked at a weekly average of 906 in November 2014, while November’s monthly average was 904.
While the downturn is painful to producers, cycles of expansion and contraction are the norm for the industry, Ingham noted, observing that the market is working “as markets are supposed to,” as supply and demand try to get into equilibrium.
Ingham noted that the current downturn will benefit a number of people outside of the industry.
”Markets actually exist to serve consumers, not producers. The events of recent years, and the current market outcomes driving this downturn, are actually the desired result for energy consumers in America – abundant supply, not established for decades into the future, at prices that are more affordable than ever,” he said.
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