Oil price drop: Don‘t panic

As we went to press in mid-October, oil prices were in the midst of a very bad run, hovering near multiyear lows. 

The Oct. 14 news was especially bleak: The International Energy Agency cut global oil demand estimates for 2014 and 2015, the estimated demand for OPEC crude was cut by 200,000 bpd, a Reuters survey said U.S. crude stocks had risen the previous week, and the U.S. Energy Information Administration predicted rising shale oil output in November would add over 100,000 bpd from October. Add to that the weak economic data out of Europe. 

Also on Oct. 14, U.S. oil prices fell almost $3, to around $83 a barrel, which put them on track for the biggest one-day drop in over a year.

The big drop in oil prices has hurt oil service issues. In our monthly WorkBoat Composite Index (see page 12), every operator except Cal Dive lost ground during September, with Hornbeck Offshore Services, Tidewater and Gulfmark Offshore among the biggest percentage losers. The PHLX Oil Service Sector Index lost 29 points, about 10%. The slide for oil and oil service stocks continued in October, with the energy sector continuing to get pounded.                                                      

But we have dealt with oil price fluctuations before. Remember in 2004 when oil companies were making record profits at $35 a barrel? Then by September 2005, prices had more than doubled. Even at today’s “distressed” prices, oil companies can still be profitable.

Fatih Birol, the IEA’s chief economist, told the Wall Street Journal on Oct. 13 that global oil prices above $80 a barrel can sustain all production projects. “Globally, when we look at oil prices today, I believe there is not one single drop of which cannot be produced for commercial reasons with today’s prices,” Birol told the WSJ

OPEC officials say shale can also handle $80 a barrel.

In their second-quarter earnings calls this summer, several oil service companies maintained positive long-term outlooks. Todd Hornbeck, chief executive officer of Hornbeck Offshore, said he firmly believed that the sector was transitioning into a sustained up-cycle.

I, too, maintain a positive long-term outlook.

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