Oil Market Evades Storm, but Prices Stay Firm

First among the reasons: additional hurricanes. Although these are difficult to predict, most forecasters suggest that additional tropical activity is likely before the hurricane season winds down in November. In fact, September and October are typically the two most active months for Gulf of Mexico storms, something oil and gas investors know all too well.

Moreover, fundamentals of the crude market remain challenged. Challenges facing refiners in recent months have stressed gasoline supplies and, as a result, helped keep crude prices higher than most observers, including me, had expected this year. While the summer driving season is quickly coming to a close and inventory levels have grown modestly, attention will turn to heating oil production, where inventory levels are also taxed as refiners have focused on gasoline production.

As a result, while crude prices are likely to take a seasonal breather come September, prices below $65 per barrel are likely a thing of the past.

In addition to hurricane risk, geopolitical risk remains a real issue. The biggest surprise may come from Nigeria, where the violence and disruptions to production continue, although it is out of the headlines. Now, a group of companies are considering reducing their head count in the Niger Delta region, a move that could affect longer-term production potential.

Concerns also remain in the Middle East, Venezuela and Russia and could have an impact on price.

If that's not enough, the marginal cost of producing each new barrel of oil continues to move higher. Estimates suggest that the cost of new oilfield developments has more than doubled in the past five years as new technologies, deeper drilling and more difficult exploration horizons combined with accelerating drilling and completion rates have caused finding and development expenses to soar. If the trend holds higher, not lower, oil prices are likely in our future.

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At time of publication, Edmonds had no positions in stocks mentioned, although holdings can change at any time.

Christopher Edmonds is managing principal at Energy Research & Capital Partners, an energy investment firm and an affiliate of FIG Partners. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.