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Higher oil prices could signal more drilling
Producers cautiously optimistic about upward trend
new deh oil prices and drilling pic
An oil drilling rig is at work north of Great Bend. An upturn in oil prices might spur more drilling. - photo by DALE HOGG Great Bend Tribune

High demand for gas driving high demand for crude

Average retail gasoline prices in Kansas have risen 2.6 cents per gallon in the past week, averaging $2.16 earlier this week, GasBuddy’s daily survey of 1,329 gas outlets in Kansas notes. This compares with the national average that has increased 3.0 cents per gallon in the last week to $2.32. 

Including the change in gas prices in Kansas during the past week, prices were 34.0 cents per gallon lower than the same day one year ago and are 17.6 cents per gallon higher than a month ago. The national average has increased 11.1 cents per gallon during the last month and stands 42.7 cents per gallon lower than this day one year ago.

In Great Bend, the price stood near the state average at $2.15 Thursday.

According to the American Automobile Association, this year’s summer driving season is expected to be characterized by higher-than-normal gasoline demand, and demand remains on pace to test record levels reached in 2007. Refineries nationwide are working in preparation for what is likely to be record breaking season and if they are able to keep pace, pump prices should remain relatively lower.

 Although it may frustrate summer motorists reveling the cheapest gasoline in years, historically low crude prices have rebounded some, dragging the pumps costs up along with them.

But, this increase helps beleaguered oil producers besieged by low oil prices and looking to resume drilling.

“There is a glimmer of light at the end of the tunnel,” said John Farmer IV, a Russell oilman and a vice chairman of the Kansas Independent Oil and Gas Association Board. “However each operator may be different as to when they are get back to drilling.”

It’s been a long, downhill slide and it will be a long climb.

According to the Independent Oil and Gas Service Inc., crude prices have been in free fall for about two years. Since April 2014, there has been a downward trend form per-barrel prices in the $90 range to a low of $20.88 this spring. 

It has increased some and hovered around $40 as of Wednesday.

Also, the IOGS  reports Kansas’ well count has dropped from 42,809 in 1995 to 33,695 this year. In that same span, barrel production plummeted from 45.4 million to 3.4 million.

By comparison in Barton County in those 21 years, the number of wells fell from 2,339 to 1,186. Production tumbled from nearly 2 million barrels to under 150,000.

When graphed together, the oil drilling rig count closely shadows the crude price. Now that oil prices are headed upwards, the number of rigs is following suit.

A wait-and-see attitude

“There could be a point in a rising crude price environment where a lot of operators will want to start back up with drilling and we could have a shortage of rigs available to accommodate this demand,” Farmer said. “Therefore we are going to start trying to evaluate some ideas now.”

He knows there are still some operators that are wanting to see a more established  positive cash flow for a while before they begin drilling.   “The pain of this crude price decline has made them very cautious going forward.”

As for Farmer and John O. Farmer Inc., he said they are in a pretty good place and the company has a “pretty nice” inventory of locations to be drilled once the price recovers. “This may be due to the timing of when we shot 3D seismic over the acreage and the decline of the crude price occurring nearly simultaneously.”  

John O. Farmer filed intents on two wells in Thomas County in the last week and plan to drill three to four more before the end of the year if prices holds. 

Reversing a trend

Kansas crude oil prices dropped below $20 in early 2016 as a global glut of production drastically dropped prices. The drop in crude oil prices triggered over 70 bankruptcies of oil gas exploration and production companies, said KIOGA President Ed Cross. 

However, “a steady contraction in production by U.S. producers and a corresponding slide in crude oil inventories have fueled a modest price rebound,” he said. Other factors bolstering prices include attacks on Nigerian oil installations and massive wildfires in Canada that have undermined Canadian oil production in recent weeks.

“I would best describe Kansas producers as cautiously optimistic about oil prices,” Cross said. Companies are refocusing capital expenditures and planning their way out of this downturn. 

“They are optimizing operating cost structures to achieve more efficiency gains and becoming more specialized regarding their core producing assets,” he said. Many independents in Kansas appear to be focusing on the most resilient short-cycle projects and focusing on their core competencies and small producer advantages. 

Total petroleum deliveries, a measure of demand, in April rose 3.6 percent from April 2015 to average 19.7 million barrels per day, the Amereican 

Petroleum Institute reporterd. These were the highest April deliveries in eight years, since 2008.

“April continued this year’s trend of record gasoline demand thanks to low prices,” said Erica Bowman, API e chief economist. “Record high crude oil stocks – the highest since 1920 – contributed to the record high gasoline consumer demand for the month of April.”

Total motor gasoline deliveries, a measure of consumer gasoline demand, rose 2.5 percent from April 2015 to average nearly 9.4 million barrels per day–the highest April deliveries on record. Distillate deliveries averaged just above 4 million barrels per day, up 1 percent compared with April 2015.

Crude oil production fell 7.8 percent from April 2015 to average 8.9 million barrels per day in April, the lowest output level in 20 months.   

U.S. total petroleum imports in April averaged 9.9 million barrels per day, up by 6.7 percent from the prior year. Crude oil imports increased 8 percent from April 2015 to 7.8 million barrels per day. 

Gasoline production for the month of April averaged 9.8 million barrels per day, up 0.2 percent from the prior year. The April 2016 gasoline output was a record high for the month. Distillate production in April fell from the prior year to the lowest April output level in three years. Distillate fuel production in April fell 4.7 percent from April 2015.