Oil, gas prices expected to remain solid, demand for polymer goods strong

FORT WORTH, Texas—Unless market factors take a serious turn one way or the other, the oil and gas market should be in for a relatively stable time for the foreseeable future.

Stable, as in oil prices that remain in a range that isn't too high or too low, allowing those producing the energy to make nice profits. Stable, as in natural gas prices that aren't expected to go crazy again in Europe, thanks in part to a mild winter and ample supply.

And stable in a way that producers of rubber and polymer goods that service the oil and gas sector will have more than enough work to keep them busy, but where some market conditions may prevent them from being able to take advantage of growth opportunities.

"I think it will be a good solid market. Things are going to be very profitable, but just not 'blow your doors down' like it's been in the last year," Neil Mendes, CEO of Fort Worth-based Alpine Polytech L.P., told Rubber News.

For starters, he said oil prices are projected to stay somewhere within $10 of the $80 a barrel range, perhaps a bit lower for WTI crude and a bit higher for Brent oil. That was from a forecast given in early March by an official of the Federal Reserve Board in a presentation to a meeting of the Energy Polymer Group, of which Mendes currently is chair.

"All things will contribute to being 'steady Eddie,' which is quite good for the industry," Mendes said. "Oil at $80 a barrel means the people who know what they are doing make very good money. Probably not the kind of money they did this past year, because refining profits are down a lot. Natural gas is down. Oil is very steady. You won't see the crazy profit numbers we saw this past year, but they'll be very profitable."

As for the natural gas situation in Europe, between Russian natural gas still making its way to the European Union and some additional supplies from regions such as the U.S. and Kuwait, the market isn't showing near the volatility it did in 2022. With those supplies, some rationing and the mild winter, he said the hyper inflation prices of natural gas in Europe should not be recurring anytime soon.

Storage is in the 55-60 percent level, so the region will have plenty of time to restock before next winter. "Natural gas needs to be paid attention to, but it's not going to be the hot button issue it was," he said.

One thing that appears certain is that, for a variety of reasons, the shale oil plays will no longer get the investments they attracted in shale's boom years. That stems from both the price of oil and the fact that many investors are shying away from putting capital into fossil fuel projects.

Mendes said the Permian Basin in the Southwest U.S.—regarded as the best U.S. shale play—has started to see some firms curtail drilling activity. Not tremendously, but enough that it is beginning to make a difference.

"If the cost of money is high, and you're drilling for oil, which has traditionally been a $40 to $50 a barrel cost ... and you have to borrow money to do it at a higher (interest) rate, that pushes that cost per barrel of oil into the $60s to produce new oil," Mendes said. "And if the price of oil is in the $70s, that's not a lot of margin."

So some are backing off because capital is tight, and people don't want to lend money to people who haven't made money. On top of that, he said, is the negative vibe with investors investing in fossil fuels.

This combination of factors has blunted the shale output somewhat, which is much of the reason U.S. oil production currently hovers around 11 million to 12 million barrels a day, compared to a high point of 13 million a day, according to Mendes.

"The best reservoirs will be produced with the best rigs and the best hands, and those people can make very good money doing it," he said. "After that it's a sliding scale."

For example, while there has been some cutting back in the Permian Basin, some of the biggest companies such as Chevron and ExxonMobil continue to produce there in a very economical manner.

There also has been public talk—including a story in the Wall Street Journal—that some of the reservoirs may be past their best days, and that the technology may have peaked.

"Once again, the technology has come a long way over the last 20 years, and when there's all this fallout politically about fossil fuels, there are a lot of companies that say they're going to live with the technology they have," Mendes said. "They say they have very good technologies that are reliable. And that's what they're going to use, because the payback is at risk."

Mendes said he is in no way a climate change denier, but he is a realist. And given the numbers, he and others say it's likely the world will be using as much oil and gas in 15 years as they are today.

That's because there are 8 billion people in the world now, 2.5 billion of those considered to be in "energy poverty." And the United Nations projects the population to grow to 8.5 billion by 2030, 9.7 billion by 2050 and 10.4 billion by the end of the century.

"You are going to see energy demand continue to increase," he said. "A tremendous amount of energy that's renewable is just going to get eaten up by the increased energy demand."

Right now, the world uses roughly 101 million to 102 million barrels of oil a day. Mendes expects that to grow slowly and peak in the next seven years. After that, he projects consumption will hover in the 100 million to 105 million barrels-per-day range for another 10-15 years, before it starts to decline.

"All of these new technologies will come through," he said. "But to build up the infrastructure, all renewables require a whole lot of other things like copper and lithium and cobalt. There are only so many of these mines in the world."

He noted that a single windmill can use tens of thousands of pounds of copper, and when you start doing the math to bring that renewable energy market up to scale, it's definitely a limiting factor.

Technologies for mining will improve, he said, but mining in the end still hasn't changed much in the past century. "Nobody has doubled a known commodity's output ever. Let alone go up four, five or 10 times the amount of output over a decade," Mendes said. "Once a known commodity is mined, you can raise it by 10 percent. That's great, but the need is to triple or more in order to scale up to production."

Most of the companies supplying rubber goods such as seals and other products for the oil and gas market are extremely busy. They are running typically at full to excess capacity, but they do not have the ability to do more to meet growing demand.

Mendes said that is because there has been a tightening up of fluoroelastomers supply, and a shortage in the market for HNBR.

"Because of that, there is somewhat of an inability to respond to the upside of the market," he said. "Many can't really overproduce right now. They don't have the facilities or people and the product in place to really meet demand."

But it's not the only bottleneck in the marketplace, and rubber goods makers seem to believe they have enough supply, staffing and capacity to make a good living at it, Mendes said, if not quite meet higher demand.

He added there was a good crowd of 160 at the Energy Polymer Group's meeting in March, and that's a good indicator of a strong market.

"People are wanting to understand the new technology that is coming out, where the market's going and what some of supply chain issues are," Mendes said.

Supply chain problems are easing and lead times are improving, though not moving down at the present time. But with lead times that are longer than the traditional past but shorter than recently, the market is adjusting to this new normal, he said.

"It's not just on the polymer front. There are enough bottlenecks for steel and other things that, if you're not the pacing item, (your goods) will probably deliver when everything else is coming in," he said.

"If you are the bottleneck, then it's a problem. But when everything is just slower than it used to be, then it's not that critical."

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