Traders Ramp Oil Prices As Aramco Underwriting Fees Dangle Ahead

Oil is bouncing again, with the price of a European Brent barrel passing $70 today–more than doubling since 2014, and WTIC above $64 for the first time in more than three years. Speculators are piling on, spiking volatility and price instability.

The Saudis have said they want oil about $60 a barrel to meet their cash flow targets, but not so high as to encourage more turning on of the taps from other producers. Too late. In today’s tech-rich oil sector, higher prices mean more production even without more rigs. Production advances are racing faster than most dreamed possible. See: Why oil is up, but rig count is not:

The number of rigs drilling for oil in the U.S. — from the Gulf of Mexico to the Permian Basin in Texas to the Bakken shale in North Dakota — is less than half the count in the middle of 2014, when the crude market crash began. And yet, America is set to rival Saudi Arabia and Russia, with production expected to top 10 million barrels as early as next month and to reach 11 million toward the end of next year.

How? The combination of faster and faster horizontal drilling and more intense fracking has allowed production to explode even as the number of rigs drop. Up until about four years ago, it was safe enough to use the rig count to track activity because the industry was more reliant on single vertical wells…

At 7,500 feet, the average lateral length of a well is 50 percent longer compared to three years ago. And a rig can drill 25 wells a year, compared to 15 just two years ago.

The race is on.  Incentives to corner markets and ‘trade’ oil higher loom huge as Goldman Sachs and Citigroup are wrangling for lead roles in OPEC’s planned Aramco IPO later this year; the share sale could raise an estimated 1.5 to 2 $trillion–depending on oil prices.  Longer-term prospects for IPO buyers be damned; imagine the upfront underwriting fees to be scooped here.

Beyond the IPO hype though, the truth is that OPEC’s influence on oil prices is waning by the day. Canadian producers are stuck in this game of chicken too: higher prices mean more incentives for more supply, alternative fuels, higher efficiency and thus lower prices. And so it goes.