Thursday, February 02, 2006


According to numbers supplied by James L. Williams, Energy economist, the US is completing oil wells at an ever more rapid pace. For example, in November of 2005, the US completed 927 oil wells versus 639 completions in November of 2004.

There are two reasons so many wells are being finished. The first is that there are more rigs drilling. The world wide rig count is up about 200% in the past 6 years. Even the Saudi's have doubled their rig count. The second reason is that technology has reduced the number of dry holes.

In the US in November of 2005, we produced 458 dry holes and in November of 2004 we produced 389 dry holes. The total number is higher but as a percentage of producing wells the number is lower.

Horizontal drilling is a part of the new technology that reduces the total costs of drilling. When a deep hole has already been drilled, it requires less work to drill sideways to the next pocket of oil.

There is much more good news for the oil consumer. US refineries are producing more gas this year than in the past two years at the same time of year. Total available supplies are building. Crude oil supplies now sit at 11% higher than the five year average at this time of year.

Weather forecasters predict that cold weather is on the way. January was unusually warm. The Iran situation is still a risk. However, the weather effects will be temporary and Iran cannot afford to not sell oil. The country needs money.

Exxon and other oil patch companies are enjoying record earnings but please remember that cyclical stocks move up and down based on future increases or decreases in earnings. It is becoming more and more difficult for oil companies to grow earnings as the current price is promoting the substitution of alternative fuels.

That last sentence does not imply that one should run out now to invest in alternative fuel production. These firms have the same problem as the oil companies; they cannot grow earnings rapidly if demand dies at higher prices.

Watch the data closely in the next few weeks. I believe you will see that growing supplies in storage will exert downward pressure on oil prices. Natural gas is finally trading back in line with distillates. The weird prices are getting back to normal. I believe the next move is down to the $55 range before the end of spring.