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Forbes: Oil prices jumped in September and early October of this year (2018), but have dropped $20 a barrel in the last few weeks. The sharp turnaround is attributed to OPEC’s inability to cut supply, but this is old-fashioned thinking. OPEC’s power is a small fraction of what it was in the 1970s. What’s happening now is wild swings in thinking about the future.
Oil prices have to balance supply and demand, of course, but not necessarily today’s supply and today’s demand. Commodities traders can hold inventories in storage tanks if they think that prices will be higher in a few months, and producers can run wells at lower pumping volumes. (There are limits to flexibility in pumping volumes, though, based on the technical characteristics of each well.)
When traders and producers expect falling prices, they can sell quickly from storage tanks and push their wells to maximum flow to capture today’s prices.
Expectations of future supply and demand play a large role in current prices. And demand, in particular, is a bigger mover.
Future demand, though, is highly variable. Routine variation in the world economy can cause demand over the next decade to rise or fall three percentage. Throw in the possibility of a global recession and potential drop in demand is even greater.
Today’s buyers and sellers of oil are looking out over the next decade, estimating future demand and supply. A small change in expectations about the future can translate into a major change in future supply-demand balance, which in turn translates into large price changes.
The translation from supply and demand into prices is much sharper in the oil market than in other commodities. Take cotton as an alternative. High prices for cotton induce more planting, which puts more cotton on the market within a year. High prices will also discourage the use of cotton. Producers will substitute more synthetic fibers to keep prices low. Both supply and demand adjust quickly.
In the oil market, though, increasing supply means only a little from inventories, a bit more from increased fracking in the next year, and a lot of new exploration over the next ten years. For demand, higher prices will lead drivers to cut back driving, but habits are slow to change. High gasoline prices push a change from big pickup trucks and SUVs to smaller cars, but changing the entire inventory of motor vehicles on the roads takes even longer than a decade. Energy used in power plants, ships and big-rig trucks also changes slowly, as the engines and other machinery are swapped out.
In short, oil markets have slowly-changing supply and demand. (We economists call this short-term inelasticity of both supply and demand.) Thus, a pretty big price change is needed to cure a supply-demand imbalance in the short-run.
Future supply from wells (as opposed to supply from inventory) is fairly stable. That is, knowing the reserves currently being tapped explains most of production. Fracking activity can be dialed up or down, causing a short-term increase or decrease in supply, but within narrow limits.
Higher oil prices will induce greater exploration and development of new oil fields, but that takes about a decade. (Time frames are variable, of course, but ten years is a good rule of thumb for bringing new production online.)
That’s why oil prices tend to jump up and down. Current prices (as of this writing, $56) are about equal to year-ago prices.  It’s been just a bit over four years since prices were over $100, and less than three years since they were $27. FocusEconomics, which compiles forecasts of countries all over the world, sees lower global economic growth being forecast for both 2019 and 2020.
What’s the outlook? Current prices will not induce a great deal of new exploration, though they justify infill drilling in known fields. Consumers and business users of petroleum will not spend great amounts for more efficient machinery. So prices will probably rise.
Sharp gyrations are likely as global business expectations rise and fall. That will be the key to future oil prices. Right now analysts are a bit gloomy, probably due to trade tensions, political disruptions in Europe and the United States, as well as uncertainty about China. Look for more volatility in the months to come.
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Valaris Limited announced new contracts awarded subsequent to issuing the Company’s most recent fleet status report on February 21, 2023. Three-year contract with Petrobras for drillship VALARIS DS-8. The rig will be reactivated for this contract. The total contract value is approximately $500 million, including a $30 million mobilization fee. 100-day contract with a TotalEnergies affiliate for drillship VALARIS DS-12. The contract is expected to commence in second quarter 2023. 70-day contract with Beach Energy offshore New Zealand for heavy duty modern jackup VALARIS 107. The contract is expected to commence in third quarter 2023. The total contract value is approximately $26 million. President and Chief Executive Officer Anton Dibowitz said, “We are particularly pleased to have secured the award for preservation stacked drillship VALARIS DS-8, for a contract that is expected to generate a meaningful return over the firm contract term, and we remain focused on exercising our operational leverage in a disciplined manner. This most recent award represents the sixth contract awarded to one of our high-quality stacked floaters since mid-2021, and speaks volumes about our demonstrated track record of project execution when reactivating rigs.” Dibowitz added, “Following the reactivation of VALARIS DS-17 and DS-8, we will have ten floaters working across the golden triangle, including four drillships in Brazil, a market where we expect to see continued growth over the next several years.” Updated Guidance As a result of the contract awarded to VALARIS DS-8, which will require the rig to be reactivated from preservation stack, we are updating our first quarter 2023 and full-year 2023 guidance provided on our fourth quarter 2022 conference call on February 21, 2023. First Quarter 2023 Contract drilling expense is expected to increase by approximately $5 million to $385 million to $395 million. Adjusted EBITDA is expected to decrease by approximately $5 million to negative $5 million to breakeven. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $25 million to $30 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Full-Year 2023 Revenues are anticipated to be $1.8 billion to $1.9 billion, unchanged from the guidance provided on our fourth quarter 2022 conference call. Contract drilling expense is expected to increase by approximately $60 million to $1.49 billion to $1.59 billion. Adjusted EBITDA is expected to decrease by approximately $60 million to $180 million to $220 million. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $280 million to $320 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Capital expenditures are expected to increase by $60 million to $320 million to $360 million. Source: Valaris Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
Seadrill Limited announced that the West Neptune has executed approximately six months of term extensions with LLOG Exploration Offshore, L.L.C in the US Gulf of Mexico. The extensions will commence in direct continuation of the existing term, and will keep the rig busy until Q3 2024, furthering Seadrill and LLOG’s long-term association. Total contract value for the extension is approximately $79 million. Source: Seadrill Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
Semisub rig owner Dolphin Drilling has inked a new contract with Peak Petroleum in Nigeria for its 1974-built Blackford Dolphin. The firm contract, which follows the letter of award in January, gives the Euronext Growth-listed owner of three rigs the potential to extend the unit’s backlog by a minimum of 120 days and up to 485 days. The deal adds to and will be a direct continuation of the previously announced 12-month contract with General Hydrocarbon Limited (GHL). Øystein Stray Spetalen-backed company said the effective dayrate associated with the minimum firm period of the contract is $325,000, including the mobilisation fee. “The final award of the contract for Blackford Dolphin shows the opportunities in Nigeria at a strong dayrate, in addition to building on the backlog for the rig. It also underlines the attractiveness of our assets, and we look forward to returning to revenue-generating operations in 2023,” noted Bjørnar Iversen, CEO of Dolphin Drilling. Source: Dolphin Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here
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