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Oil price volatility eases as concerns fade

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Permian Basin producers might feel whiplash as they watch crude prices rise and retreat this year.

The good news is oil price volatility appears to have eased since its March peak, the Energy Information Administration said.

A recently released report from the EIA finds prices were relatively more volatile in the first quarter than in recent history. The 30-day measure of oil price volatility reached a high of 45 percent on March 4, falling to 33 percent in April 18. March levels were the highest since early 2009 as prices were falling amid the financial crisis. Volatility levels in 2015 averaged 27 percent, the EIA said.

The EIA said higher volatility happened when oil prices were low and driven by high uncertainty over supply, demand and inventories. Volatility has eased as oil prices strengthened with fading concerns over future economic growth and slowing oil inventory growth.

John Hogg, owner and president of Skybattle Resources in Calgary and president of the American Association of Petroleum Geologists, said during a recent visit to Midland that while some analysts believe supply and demand will be “okay” by the end of the year, he’s not so sure.

He does believe oil prices will stabilize by at least the second or third quarter of 2017. But new supplies could alter any forecast, he cautioned.

U.S. oil production declines are expected to not only continue, but continue at a higher rate because more production is coming from unconventional reservoirs that have far higher decline rates, he said.

“Now that drilling has stopped, each quarter of production decline will take years of future drilling” to address, Hogg said.

Price volatility was introduced to the markets after the 1973 Arab oil embargo, and volatility has risen over the last decade, according to Hogg.

He noted that, in earlier price decline periods, it could take a year for the rig count to respond. Now, response is even quicker, he said.

“Over the years, as oil prices drop, the industry responds much quicker to each volatility movement,” Hogg said.

Heightened price volatility is not a surprise, said Amarillo economist Karr Ingham. He said the first quarter of the year saw a trend change from price declines, during which prices troughed on Feb. 11, to price increases.

Crude oil prices continued to worsen in January and early February, and then promptly reversed course — in some respects just a hard ‘bounce’ off the bottom on that particular day. So, the heightened volatility is not a surprise, and prices have been relatively stable in April and thus far in May after the more chaotic price events in the first quarter,” Ingham said.

Lessened concerns about economic growth and oil in storage could attribute to the lower volatility, though those concerns remain in place, Ingham said.

“It seems as though the market seems to be recognizing the fact that crude oil production itself in Texas, the U.S. and in North America is finally declining at a more observable pace moving into 2016, which wasn’t really in place until the very latter part of 2015,” Ingham said. “That, of course, helps to somewhat alleviate concerns on the supply side. Oil at $23 posted was, hopefully, an over-reaction, but I have had the feeling that $42 oil may be a bit of an over-reaction, as well, simply because market conditions in terms of production and storage levels haven’t changed appreciably enough to warrant that sharp swing upward.”

“Is it time yet to begin to incentive new activity through crude oil pricing?” he asked. “Doesn’t feel that way to me, though I hope it’s not far off.”


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