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A Pivotal Month

John Donnelly, JPT Editor

John Donnelly, JPT EditorThis month should offer key clues to the direction of the oil market over the next several months. OPEC producing countries will meet on 5 June in Vienna in a regular meeting to discuss their current supply to the market and production quotas. And government figures released this month should begin to get a better handle on the decline in US production.

OPEC’s last meeting, in November, contributed to the steep drop in oil prices when Saudi Arabia decided in would no longer play the role of “swing producer” and would instead defend market share. Although many took this as provocative, several executives speaking at the recent IHS CERA conference in Houston noted that OPEC fears that prolonged high oil ­prices could lead to faster development of alternative energy, and the cartel is engaged in a “price discovery exercise” to determine the sustainability of US shale producers. “I think it’s going to be very useful to the industry to have a clear understanding of the resilience of these resources, how robust the resources are, and how they are able to withstand different price environments,” said ExxonMobil Chief Executive Officer Rex Tillerson. Most of the executives at the conference agreed that the current price downturn would last a while and that the current situation seemed closer to the downturn that occurred in the mid-1980s, rather than more recent price downturns.

The OPEC strategy is definitely having an impact on North American production. The US Energy Information Administration last month lowered its 2015 and 2016 crude oil production growth forecasts. Its latest Short Term Energy Outlook predicts that US crude production this year will increase 530,000 b/d (revised down from 550,000 b/d) and that 2016 growth will be 20,000 b/d (revised down from 80,000 b/d). US producers have cut spending, idled more than half of the country’s drilling rigs, and eliminated thousands of jobs. The number of active rigs working in the US had fallen for 23 weeks in a row as of mid-May.

US oil production averaged 9.3 million b/d in March but is expected to begin declining in June. In contrast, Saudi Arabia has been increasing production. Saudi Arabia grew oil output to 10.31 million b/d in April, a slight increase from March’s total of 10.29 million b/d, the country’s highest oil production in three decades. Saudi Arabia has increased output by 700,000 b/d since the fourth quarter of 2014.

The price decline has had other repercussions. In a new industry survey by Mercer, oil and gas industry employers have shifted from a strategy of “buying” talent as their core strategy to one of “building” talent instead. In a second survey, titled “Inside Employees’ Minds: What oil and Gas Employees Value,” workers now rank job security and base pay as their top concerns. Compared with previous oil industry surveys and surveys in other industries, ranking job security over base pay is ­atypical.