Strong Drop in Oil Prices Holding Gasoline Prices Down

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Crude oil and natural gas prices have dropped 15 percent in the last 90 days due to stable demand, coupled with strong and consistent supplies. As a result, September gasoline prices have been pushed to a four year low and could sink below $3 a gallon at the pump, according to Farmers National Company, which manages more than 140,000 oil and gas interests in 40 states.

Crude oil and natural gas prices have dropped 15 percent in the last 90 days due to stable demand, coupled with strong and consistent supplies. As a result, September gasoline prices have been pushed to a four year low and could sink below $3 a gallon at the pump, according to Farmers National Company, which manages more than 140,000 oil and gas interests in 40 states.

Total U.S. crude oil production averaged an estimated 8.6 million barrels per day (bbl/d) in August, the highest monthly production since 1986. Driven in large part by enhanced drilling and completion techniques by domestic producers, the dramatic increase in oil production in the U.S. has tempered crude prices worldwide.

“There are three major factors that are forcing downward price pressure on crude oil right now, the dramatic increase in U.S. production the past few months, reduced global demand and the expectations of a stronger dollar” said David Smith, senior vice president of the oil and gas management division of Farmers National Company. “We predict crude oil prices to remain stable for the next few months, averaging $90/bbl to $105/bbl a barrel, consistent with the average price range we’ve seen in the last two years. If prices remain fairly stable and within this price range we will continue to see domestic exploration and production companies keeping a strong and steady leasing and drilling pace during 2015.”

Smith said Farmers National is having great success in marketing their clients’ unleased mineral acreage in a number of areas across the county. The states with strong leasing activity including Texas, Oklahoma, North Dakota, New Mexico, Michigan, California and Colorado. Lease prices per acre vary greatly by area but in the most active plays it’s not uncommon to receive $500-$3,500 per net mineral acre for a 3 year lease.

By far the hottest states for drilling in the country continue to be Texas, Oklahoma and North Dakota. Texas has two of the nation’s largest shale oil plays in the Permian Basin in West Texas and the Eagle Ford in South Central Texas. The activity in these two areas has doubled the state’s crude production in the past two years making Texas a larger oil producer than Venezuela or Kuwait. The South Central Oklahoma Province (SCOOP) and the Bakken area in North Dakota are also remaining extremely active. The SCOOP area alone had 200 drilling permits filed in August with the majority being horizontal where one mile lateral extension can cost over $8 million and $13 million for a 2 mile lateral.

“The U.S. rotary on-shore drilling rig count continues to increase from a year ago when 1,770 were operating and the count now stands at 1,930” said Smith. “That number continues to increase as new rigs are constructed and new areas are developed. Much of the drilling the past couple of years by operators has been to hold acreage under expiring leases but we are now seeing leasing in a number of new or expanded areas across the country. With our successful leasing efforts the last few months we expect to begin seeing a new wave of good wells drilled on our clients’ mineral acreage during 2015 and into 2016.”

Overall trends in the energy industry indicate that prices will remain strong but stable with little adjustment for the remainder of 2014. Strong production and exploration are keeping the market healthy. Crude oil and liquids prospects continue to be the headliners with over 80 percent of all new wells focused on oil or liquids plays due to the depressed natural gas prices.

“If crude prices remain above $85/bbl and natural gas remains below $5.00/mcf these trends should continue,” said Smith. “Moving into 2015, we expect current natural gas prices to remain flat and average between $3.75-$4.50/MMBtu for most of the year. Nothing is really pushing the natural gas market with another mild summer season, excess capacity and the government restricting exports. A colder than normal winter is forecasted but it will take a couple of cold winters to begin making a significant impact on pricing.”

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Joni Williams
Albers Communications Group
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