Has the oil and gas slump hit bottom? Analysts take a ‘wait and see’ approach
 

[July 13, 2015]  By Rob Nikolewski │ Watchdog.org
 
 After 29 straight weeks of declines, the rig count for U.S. oil and gas operations has gone up for two weeks in a row.

While the reversal is offering some hope the industry’s downturn since last November has finally hit bottom, energy analysts aren’t ready to start popping champagne corks.

“There are just too many variables that can take it higher or lower,” said Tom Petrie, chairman of Petrie Partners, a Denver-based investment banking firm that offers financial advice to the oil and gas industry. “It takes more than a few rigs being put back on to give me conviction that we couldn’t just see a little pause and then another trip down.”

The closely watched rig count for oil and gas fields was up by one Friday in the weekly survey by the Houston-based oil field service company Baker Hughes, inching up from 862 to 863. That came after Baker Hughes reported a net plus of three the previous week.

Oil rigs alone were up five last Friday and 12 the week before.

That snapped a 29-week losing streak, dating back to the decision by the Organization Petroleum Exporting Countries last Thanksgiving to not cut crude production.

OPEC’s decision kept the supply of worldwide oil pumping, resulting in a dramatic drop in global oil and gasoline prices which in turn led North American producers to lose money, cut back production and lay off thousands of employees.

OPEC’s move was interpreted as — at least in part — a way to significantly hurt U.S. shale producers, whose hydraulic fracturing and horizontal drilling techniques challenged Persian Gulf oil giants such as Saudi Arabia for worldwide market share.

While the move into positive territory for rig counts the past two weeks has been small, it’s led some analysts to think the worst may be over for North American producers.

Morgan Stanley Research analyst Ole Slorer got Wall Street buzzing Thursday after releasing a report citing the U.S. rig count reversal as a sign the global oil market may be stabilizing:

Chart from Morgan Stanley Wealth Management

That could mean, the report said, that the long-term price of Brent crude — the widely accepted international price — will reach $90 a barrel. Brent futures were trading at $58.76 on Friday.

“From here, we see a very attractive risk-reward on a 6-9 month view,” Slorer’s report to investors said, adding that “green shoots (are) becoming visible.”

That would be welcome news for the oil and gas industry in the United States.

“We think the worst of the danger is behind us,” said Chris Faulkner, CEO of Breitling Energy, pointing out that since the oil crunch hit nearly eight months ago, U.S. shale companies have become more efficient and are now well-positioned to make money even though oil prices are lower.

“Production numbers are up and Saudi Arabia is not winning the game,” Faulkner said.

While U.S. rig counts were up one on Friday, the number in Canada was up 30.

Dan Steffens, energy analyst and president of the Houston-based Energy Prospectus Group, said the oil slump “probably has bottomed out,” but doesn’t expect to see North American producers suddenly going back to drilling lots of wells right away.

“All these big companies have set their capital budgets at the first of the year,” Steffens told Watchdog.org. “They don’t change that budget unless there’s some sort of drastic change in commodity prices. They’re pretty much locked in.”

Petrie said there are simply too many factors on the economic and geopolitical scene to make him confident enough to declare the worst is over.

“I could come up with scenarios that this is the case, (but) I could come up with plenty of others where this is just a head fake,” Petrie said in a telephone interview.

Related: Still standing: Shale oil producers surviving

Part of the uncertainty revolves around a potential nuclear deal with Iran, a member of OPEC that has seen its oil production slashed in recent years due to economic sanctions.

But if a deal is finalized, Iran will insist on getting those sanctions lifted quickly. Should that happen, more downward pressure would be applied on keeping oil prices low.

“We’d have to factor in another million barrels a day coming on over the next year,” Petrie said. “Not immediately, but they have 30 million (barrels) in storage. If they can get an agreement they can start selling some of that oil. If you’re thinking about stepping up your drilling … you’re not going to act on it until they see what happens with Iran.”

Other potential wild cards include last week’s meltdown in the Chinese stock market and the debt crisis in Greece, although Steffens downplays their importance.

“This dip in the Chinese market,” Steffens said, “well, stocks don’t use oil and gas. Cars do. I don’t see that being a big thing. And I sure don’t see this deal with Greece as a big crush in (oil) demand anywhere. They’re such a small part of the European economy.”

Emerging markets investment guru Mark Mobius pronounced Thursday that “China is still growing at a good pace,” an encouraging sign for oil and gas producers who want to keep seeing demand from the world’s second-largest economy growing.

“Mobius may be right, but that doesn’t mean it’s up, up and away from here,” Petrie said. “That’s why you’re getting a mealy mouthed answer from me because I feel mealy mouthed about it.”