Could Cuts in CAPEX Be the Catalyst For Growth in Oil Prices?

by: AdminThu, 24 Dec 2015

Cuts to capital spending in the North American exploration and production (E&P) sector is a stark reminder that during much of the year companies have had to tighten their belts in response to dismal crude oil prices. Estimates show that cuts have hit 30 percent in 2015, and could drop another 20 percent in 2016.

In and of itself, there’s the argument to be made that the high-dollar spending isn’t altogether necessary. In Russia, Saudi Arabia and other OPEC countries, billions have gone downhole and yielded little results, whereas production in the United States increased through efficiencies.

And that could be the opening the United States needs to reclaim its competitive advantage in global supply and demand. While analysts suggests a recovery could be two years away, a steady climb in oil prices could turn a corner when dramatic cuts to upstream capital spending come home to roost, and global oil demand is met with flat production.

The evidence is pointing to a scenario in which North America steps in with the supplies needed to satisfy demand.

“North America will be the source of incremental growth necessary to meet growing demand going forward,” Jeoffrey Lambujon, associate analyst at Tudor Pickering Holt and Co., told Rigzone. “What we’ve seen, despite continuous levels of CAPEX [capital expenditure] spending in other countries, such as Russia, Saudi Arabia, other OPEC countries, you’ve seen oil production flatten whereas U.S. production has grown. That leads us to believe that even if those countries continue to spend money, oil production shows that it’s been relatively flat for the last almost decade.”


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