$70+ Oil Prompts Concerns in Oilfield Services

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)

Crude oil futures prices have shown strong growth this year, rising from less than $50 per barrel in early January to well within the $70 to $80 range as of midday Friday. The outlook also appears encouraging for oil bulls, with some high-profile industry voices recently going on record saying that $100-plus oil could become a reality in the next year.

The current level of optimism about oil prices seems insufficient to allay concerns within the oilfield services (OFS) industry, observes one of Rigzone’s regular market-watchers. Read on for his discussion about underlying OFS worries, along with other perspectives, in this week’s installment of oil and gas market hits and misses.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Jon Donnel, Managing Director, B. Riley Advisory Services: Another week, another 52-week high for oil prices as fundamental supply and demand drivers in the U.S. remain positive. Traffic and airline volumes continue to improve, refinery utilization is over 90%, and crude storage is at its lowest level since the end of March 2020, all of which are supportive of near-term prices. Changes in OPEC+ production plans, inflation-induced demand destruction, or delays in reaching an agreement on the Iran nuclear deal could all create volatility, but the current landscape sets up well for industry cash flows for the remainder of the year.

Barani Krishnan, Senior Commodities Analyst, Investing.com: OPEC said it will raise supplies again in July, as expected. There were also expectations that U.S. crude drillers would put more rigs on the ground with prices at around $75 per barrel. That hasn’t happened, though.

Rigzone: What were some market surprises?

Krishnan: The biggest surprise was last week’s gasoline drawdown which reaffirmed the U.S. demand for motor fuels, missing since the much-hyped Memorial Day weekend that was supposed to have sounded the gun for the big summer driving activity – expected as the economy reopens fully from Covid lockdowns.

Donnel: The Dallas Fed Energy Survey for the second quarter was published this week, shedding some interesting light on the state of the oil and gas market. Details of the report highlighted issues facing the OFS providers, despite the sustained increase in rig counts and commodity prices. The business indicator indexes for the overall level of activity and equipment utilization were both down compared to the last survey and the number of companies reporting higher input costs was much higher than those reporting increased prices received for services or operating margins. High oil prices have traditionally been the saving grace for the OFS industry, but as one company noted, “[I]t’s hard to believe we are questioning how things are going with oil over $70 per barrel.” Additional consolidation, while maintaining a focus on the balance sheet, will help solve these problems, but a quick fix from “the cycle” does not appear to be forthcoming.

To contact the author, email mveazey@rigzone.com.