Abogado Aly: No Oil Price Relief for Texas Royalty Owners

Friday, August 14, 2015

No Oil Price Relief for Texas Royalty Owners

Originally published by Aimee Hess.

Texas royalty owners have sure taken a licking this year. Unfortunately, it’s probably going to get worse before it gets better.

Moody’s Investor’s Service recently lowered its estimates for future average 2015 prices of Brent crude to $55 per barrel, and of West Texas Intermediate (WTI) crude to $50 per barrel. The new 2016 estimates are $57 per barrel for Brent and $52 per barrel for WTI. Meanwhile, the futures markets for September 2015 delivery settled at $43.87/bbl on the New York Market this week.

There are many factors that affect the price of oil. Some of the factors that are in play right now probably include weak global economic growth resulting in weak demand, the increase in the size of oil inventories, the prospect of Iranian oil coming to market in the near future and the increased production by oil companies. In fact, it’s ironic that oil companies are producing more and more oil in large part because the price is so low. They produce and sell more oil at a lower price in order to realize the same income that they received when oil prices were higher.

There are downsides to these low oil prices. Many people who are retired or on fixed incomes depend in part on income from their oil and gas stock or from from mutual funds that hold shares in oil and gas companies. In addition, when the price of oil is lower, oil companies are less likely to explore new fields or try new technologies. They just don’t have the income cushion to be able to take the risk.
However, if there is one thing certain in the oil and gas industry, it’s that it is cyclical. I recall during the 1980’s when the price of oil in Texas neared $10 per barrel. The price eventually went up again, and it surely will in this case.

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