They also demand more natural resources, especially water, which is used extensively in the fracking process. Indeed, there are companies that cater solely to the water and wastewater needs of exploration and production companies. One of the more prominent water solutions company is Pennsylvania-based Heckmann Corporation (NYSE:HEK), which I suspect has brighter days ahead of it due to strengthening demand for water purification and waste management services in the energy industry.
Indeed, one of the most distinguishable trends among explorers and producers has been a renewed focus on reducing operational expenses through improvements in drilling techniques, including more effective water-management practices. For instance, Linn Energy LLC (NASDAQ:LINE) , which offered investors an enticing alternative way of investing in the company when it listed LinnCo LLC (NASDAQ:LNCO) , structured as a C-Corp, on the NASDAQ last year, reported strong results in its oily plays largely on the back of improvements in water and wastewater management.
Another independent oil and gas company, Magnum Hunter Resources Corp (NYSE:MHR) reported a sharp decline in its lease operating expenses per barrel of oil equivalent last year, as it brought on new unconventional production and managed its field operating expenses more stringently. Suffice it to say that reducing operating costs has become an overarching focus among exploration and production companies.
Final thoughts
As hordes of commodity traders will readily attest, predicting oil and natural gas prices ain’t easy. In fact, it’s really hard. But evidence suggests that the high marginal cost of oil production and the growth in unconventional sources of oil as a share of total global supply should effectively drive a floor underneath the price of oil.
Hence, while the price of crude oil could skyrocket due to a combination of unforeseen factors, it is likely to remain above the threshold level at which oil companies break even on their capital investments. But don’t just take my word for it.
Total SA (NYSE:TOT)‘s CEO Christophe de Margerie expects crude oil to remain between $105 and $115 a barrel for the year. He suggests – correctly, I think – that concern about geopolitical conflict in the Middle East is already priced in and is the reason why oil continues to trade at around $110 a barrel.
Of course, there are tail risks that could blow my theory out of the water. But, I suspect that upside surprises, which cause crude prices to soar, are more likely than downside surprises. Some of these could include the adoption of (even) looser monetary policy, the acceleration of geopolitical instability in the Middle East and other key supply regions, or a surprise pickup in global economic growth, particularly in China, the eurozone, the U.S., and other major oil markets.
The article What’s Next for Oil Prices? originally appeared on Fool.com and is written by Arjun Sreekumar.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Total SA (ADR). The Motley Fool owns shares of Heckmann and has the following options: Long Jan 2014 $4 Calls on Heckmann and Short Jan 2014 $3 Puts on Heckmann.
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