With oil prices falling rapidly the impact is being felt across the entire industry. With oil and gas jobs getting cut across the country and operators struggling to cut back on costs the pain is expected to continue. After the price of oil bottomed near $43/barrel a few months ago we started the slow climb back towards $60. In just the last few days of trading we have seen the price of oil start to fall back below key resistance levels.
With oil prices falling rapidly we are potentially heading into a bear market. On Monday we had the largest drop in oil prices in nearly 5 months with oil down nearly 8% to close the day. This does not bode well for oil and gas companies who were starting to adjust their expectations closer to $60 oil. Many oil and gas companies are running out of hedged oil production and will begin to feel the affect of current oil pricing.
Why are oil prices falling rapidly?
The cause of the recent decline in oil prices can be attributed to the Greek financial crisis, Iran’s potential nuclear deal, and broad weakness in the China economy which has a negative impact on demand. All of these factors together coupled with the already deflated demand for oil due to economic pressures has traders concerned that oil may stay lower. Fortunately many operators were setting their 2015 budgets in 2015 with the expected price of oil somewhere around $50. The price of oil today is hovering just above that key point so in the short term operators are still in a reasonable position to do ok for 2015.
However, if the factors contributing to weak oil prices continue we may see further reductions in the production of oil and gas. The rig count went up slightly for the first time in 29 weeks as oil companies began to adjust their expectations to a price closer to $60. With oil prices falling rapidly we may see oil companies once again go into protection mode and pull back on the rig count.
Falling oil prices impact on mineral owners
One of the biggest impacts of oil prices falling rapidly is the drop in oil and gas royalties checks. The drop in oil and gas royalties checks is caused by the decrease in prices that oil and gas companies are paid for the oil. Most oil and gas royalty checks are paid on a lag of around 2 to 3 months from the current pricing. This means that the lower $50 pricing won’t hit royalty checks until around September or October.
If you saw a decline in oil and gas royalty check income recently from the drop of oil around the first of the year you will likely see you oil and gas checks decrease in the near future again. If are you are considering selling oil and gas royalties, there is still significant demand for royalties. Many royalty buyers are still interested in properties.
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