We are seeing a drastic reduction in the price and royalty offers on new leases. This can be expected because of the massive price hemorrhaging that has taken place with the price of oil since July. In July, oil hit an all time record of $147 per barrel while Natural Gas was at $13.50/MM Btu. As of this posting, Oil is at $46.79/barrel and Natural Gas is at $6.35/MM Btu. Quick math shows us that oil is 32% of what it was just 5 months ago, while Natural Gas is 47% of its recent high. Many people have asked my opinion as to how on Earth this happened. Was it because of an Energy Bubble caused by Speculators? Was it because “Peak Oil” was proved wrong? Was it because of new oil discoveries which increased the oil supply? Was it because of the economic collapse? Three culprits have become glaringly obvious to me. First, the dollar strength.
This abrupt rise in the value of the dollar is mainly attributed to “de-leveraging.” Before July, many assets and commodities were perhaps over-leveraged. With the unwinding of the credit crisis these assets and commodities have experienced de-leveraging which has subsequently created massive demand for the US Dollar and increased its value. A big part of the leveraging and de-leveraging came from the rapid rise and fall in Hedge Funds. This has also affected the price of oil indirectly by making the dollar worth more. When the dollar is strong, its worth increases since oil is priced in Dollars worldwide. The massive de-leveraging is slowly coming to a halt, but it is tough to say whether or not the dollar will remain strong because relatively speaking most country’s economy’s and therefore currency’s seem even weaker than that of the U.S.
A second reason for the fall of prices is the fact that this is traditionally the time of year when prices descend. Oil prices are almost always higher in the summer, and lower in the winter. This is due to weather, the rise and fall of demand, and the summer driving season (with higher refining requirements).
Thirdly and perhaps most obvious, the current economic climate has lessened demand significantly. In fact the US went from using around 21 million barrels a day in 2006 to around 19 million barrels a day now. Interestingly enough however, world energy use is still scheduled to increase both this year and next. Increased demand from Asia and the OPEC countries is the main cause of this.