Are you prepared for the coming crude oil surge?

By David Bernal,senior solutions consultant for Allegro Development Corporation, EMEA.

Theinternational oil industry’s current focus is on low crude oil prices and the headcountredundancies and rig shutdowns that inevitably follow. This is causing too manyenergy traders to scurry for cover unnecessarily and to miss out on theopportunity to make some smart money.

In the past,a downward move of 50 per cent would have meant disaster for the oil and gasindustry. However, a convergence of new factors this time suggests a differentview of what's happening. If you can read between the lines, you can seize yourshare of opportunities while prices are down and march into the next cycle wellahead of your competition.

The price is dropping butproduction isn’t

In spite oflower prices and enduring dire news in the markets, the fundamentals generallypoint to an increased need for oil. If prices go back to the $60-$70 a barrelrange in the next year and stay there for a reasonable period of time, worldwideproduction will have to respond.

While manywells have been closed and headcount reduced, the infrastructure is still thereto scale up at short notice. The recent volatility has created a much leanerbreed of oil companies and, from a logistics standpoint, a multitude of optionshave emerged in the past five years – including rail, barge and tankers, toname a few.

In 2015, oildrilling and information technology have combined to create a perfect storm ofcapability and agility that will allow oil markets to respond with a speedtypically only seen in the digital realm.  

Fiveyears ago it could take as long as nine months to get oil out of the ground.Today, thanks to rapid advances in drilling and information technology, it takesabout 30 days to see results. You can literally go on holiday at the start ofthe process and come back to a producing well. 

Consequently,the need for transport to market hasn’t dropped. Oil tankers, pipelines, railsystems and the tracking technology behind these modes have grown insophistication. As a result, there may be no better time to be a trader – andan investor - in and within the global oil-transportation business.

Theabundance of supply is placing downward pressure on prices, with supply growthoutside of OPEC nations rising at the fastest rate. According to theInternational Energy Agency, non-OPEC countries produced 1.9 million more barrelsper day in 2014 than they did a year ago, with the US leading the way at 1.1million barrels.

So,generally speaking, production is up and, as producers become more efficient,the number of rigs required to yield the same amount of oil naturally diminishes.Rig count reductions are having little to no impact on actual production.  What is really happening is that the industryis taking advantage of this opportunity to shut down under-performing rigs.

Rigs: quality v quantity – what adifference technology can make

Technologyis accelerating the capabilities in oil field production and, as time passes,advancements in pad drilling and rig mobility will only ensure more of thesame, rendering the number of rig counts as a measure of industry healthobsolete.

Consideringadvancements in the way wells are drilled today, it’s not unusual forproduction rates at any given site to peak early and yield faster than they didin the past. The peaks are nearly three times higher than they were just fiveyears ago, creating enhanced production rates, even during decline, due todrilling efficiencies realised by more effective horizontal drilling and,particularly in the US, by hydraulic fracturing practices.

Clearly, theability to locate wells that promise higher oil output, combined with the speedat which wells reach peak production, is supporting a quality versus quantityapproach to the oil and gas business. These can be directly traced toimprovements in technology. These advancements make it possible for oilcompanies to turn a profit, even at today's depressed market prices, as thecost of producing oil continues to fall in step.

Conclusion

So, how shouldtraders and investors alike react to the media's obsession with low oil pricesand industry layoffs?

In myopinion, two camps will emerge from the current industry cycle: those who curb theirinnovation, shrink their business and limit their trading and portfolioexposure in lock step with the price of oil, and those who take advantage of theopportunity to make a profit. The latter group will increase their ITcapability and invest in the right technology to better identify opportunitiesand manage risks, positioning themselves for aggressive growth and profit whenthe cycle ultimately breaks.

Which campdo you want to be in?