What to do about Oil Price?

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My last visit to this chart in November showed oil at $60/ bbl, and I had thought we were near the lows. Since then prices dropped an astounding 42% to a low of $35/ bbl. Having recovered to $48 yesterday, on today's inventory numbers U.S. crude for February delivery fell $5.95, or 12.3%, to settle at $42.63 a barrel. Wednesday's decline was the biggest percentage drop since Sep. 24, 2001, following a week of massive oil price drops after the Sep. 11 terrorist attacks.

So again volatility is unsettling the ability of the industry to see a bottom that they can rely on for making capital investment decisions. With futures market prices in Contango (higher future month delivery price than current month delivery price), you are well paid to store inventory for later delivery. Therefore I do not think that the current prices are sustainable, and will recover to the $60 – $80 range by mid-year. However for conservative production companies I see an economic reference price in the range of $35 - $40/ bbl for assessing project returns.

SO, the focus remains cost control, and cash flow. Systems need to be able to support portfolio management decisions on well shut ins, and maintaining liquidity.

Merger and acquisition activity will emerge from this market, as cash flow shortfalls squeezes liquidity. Now is the time to gear up for your teams and systems for M&A due diligence.  

What is you view? Feed back is appreciated

Michael Sternesky - Oil & Gas Industry Development Manager.

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