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Price Drop In Crude Predicted For Nation's Biggest Oil Field

An oil rig south of Pyote, Texas, December 11, 2013.
Courtesy of KXWT
An oil rig south of Pyote, Texas, December 11, 2013.

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Price Drop In Crude Predicted For Nation's Biggest Oil Field

Price Drop In Crude Predicted For Nation's Biggest Oil Field

Courtesy of KXWT

An oil rig south of Pyote, Texas, December 11, 2013.

The energy boom in the Permian Basinof Texas and New Mexico is driving one of the nation’s fastest-growing regional economies.

But growth is tied to the price of oil, and some prominent energy analysts suggest the price of crude will fall in 2014.

Oil wells operating around the clock represent the sound of a region transformed.

Modern technologies like fracking and horizontal drilling are cutting the cost of extracting oil and gas from what was once the floor of an ancient sea laced with hydrocarbons.

Bob Randolph is an oil field supervisor working as a consultant with Arabella Petroleum. He runs crews drilling through the Permian’s porous shale. Rigs that are 140 feet tall back up against each other on to the dusty horizon.

“Things are real good," Randolph said while scurrying around the base of one of the rigs. "The drilling industry is doin’ good. Price of oil’s hanging in. Need the price of natural gas to come up a little bit but the oil field’s doin’ real good right now.”

In Texas they say everything’s bigger. Never more true than in the Permian Basin today. Private jets compete for parking space. Rents are on a par with San Francisco. Streets are full of luxury cars, all symbols of wealth all pegged to oil and gas prices.

The price of West Texas Intermediate crude (WTI) is the nation’s benchmark for oil.

Right now it’s around $98 a barrel. That’s a healthy price for continued industry growth.

But one of the industry’s most followed analysts says the price of crude is set for a drop. Fadel Gheit at Oppenheimer in New York sent a noteto clients predicting prices will fall in 2014.

“We think oil prices inflated by as much as 20 to 30 percent," he told Fronteras Desk.

Gheit says in the big picture, the Permian’s economy will withstand any downward pressure. But he suggests jobs might be lost as big players swallow junior operators.

Companies such as Exxon Mobil and Chevronare established here.

He said the supply-versus-demand equation does not look good entering the new year. He says there's plenty of oil stockpiled domestically.

And he suggests the market has priced in the possibility of an interruption of supply from Iran that he suggests will evaporate once Iran and the international community settle the future of Iran's nuclear ambitions.

“I think we are in a bubble and bubbles always burst, the question is not 'if,'" he said. "It’s 'when.'”

Oil and gas investor investor Bill Dingus of Midland, Texassays even if oil prices drop, modern technology will continue to cut the cost of extraction. That means the energy play here is sustainable.

“The difference between today and 20 years ago is, used to, you drilled a hole in the ground and you hope you find oil. Now we know we’ll find oil,” he said.

Dingus says industry consolidation that Gheit is predicting has already started.

“And the reason is because this is a big boy game,"he said. "It’s expensive drilling. And if the price does drop the margins get smaller and it squeezes out the people who can’t live on a 12 percent rate of return.”

That’s considered a modest return these days in the Permian Basin.

Benjamin Shattuck with Wood Mackenzie in Houston says crude won't plummet. He says Permian Basin companies with deep pockets will thrive.

“Everything we’ve seen is that these are pretty promising plays going forward," he said, referring to the Permian Basin.

"Certainly a lot of work to be done and there is uncertainty there. But for the best operators you’re looking at a very bright picture going forward.”

Some workers in the oilfields of Texas and New Mexico are concerned that lower-priced crude may threaten their jobs.

But many investors hope the oil market cools. They are looking for a buying opportunity to get into the Permian Basin boom.