Fine: Oil at halftime, 2016
The question of the oil-price reality pervaded the talks and private conversations at the Four Corners Oil and Gas Conference earlier this month. From the lowest price per barrel in nearly eight years to a recovery halfway to $100 in less than three months! Is the “bust” in the San Juan Basin dissolving as others before?
Yet, Ken McQueen, retiring vice president of WPX in the San Juan Basin, and the most effective in technical innovation in the basin, said: “price is not everything.”
This is the view of surviving management. It is not shared by financial institutional players and speculators.
Before Thanksgiving 2014, I presented a forecast for the oil price in a new “crash” range of $23 to $28. This was based on analytical experience and petroleum economic history. The trade associations were then spinning that it was an opportunity and would turn around in weeks.
They had no understanding of Saudi Arabia and OPEC as the price-setter. The price of oil collapsed three months ago to $26.70.
There was an abortive effort by OPEC and Russia at Doha, Qatar, to freeze production at Jan. 1 levels to “re-balance” world demand and supply. It failed because OPEC was no longer outside the Middle East political and religious war — Shia-Iran, with oil export sanctions recently lifted, did not show up.
But a one-day oil field workers stay-at-home in Kuwait took one million barrels of oil off the over-supplied world market within 24 hours and the financial market players covered their short or future sale positions.
The bet was now that every “outage” or supply disruption in the world would “re-balance” demand and supply and move West Texas Intermediate prices higher.
Saudi Arabia alone is replacing all the “outage” oil while the San Juan Basin and Southwest producers have record lay-offs, bankruptcies, community economic dislocations, and cuts in production: a million barrels less per day by Christmas is anticipated.
Without the freeze of OPEC production, $50 a barrel prices are here nevertheless. Does the rig count recover — only 15 working in New Mexico from over 100 just 18 months ago?
Yes and no. Companies should start stimulating (fracking) the heavy inventories of uncompleted wells. A boom again? Hardly. With more drilling of uncompleted wells at $50, American Southwest unconventional production rises. Saudi Arabia and the Gulf nation producers would see once more the threat to market share which started the bust in the first place.
Higher oil prices equate to more production and energy-related banks and funds might find new borrowers. Is this the constraint of lower and longer oil prices? It doesn't matter what supply forecasts come from traders’ prattle on cable TV. The final half of 2016 will be negative on price and oil demand. The price war with Saudi Arabia/OPEC continues.
There are three counter-strategies to Saudi Arabia and OPEC from American shale oil producers and communities:
(1) Unrestricted export of American crude oil. This passed both Houses and the White House signed on only with extended tax credits for wind and solar for five years added. It has failed to create one million jobs and move the GDP upward. Producers are getting less for their oil (WTI) and shipments of American oil to foreign markets have been symbolic.
(2) A new North American oil trading bloc based on a strategy of no need for Middle East oil launched by Boone Pickens last month.
(3) The call for the reduction of foreign oil imports through quotas which could be proclaimed by the next American president in the first 60 days of next year. President Eisenhower did it and saved the domestic American oil industry until 1973. Saudi Arabian and OPEC light crude oil, which is the New Mexican and Southwest oil grade, would have a quota of zero. Why import something when we have it here in abundance — we are in “bust” conditions for having too much of it — and the imports protect OPEC’s market share?
This writer will further explain No. 3 at the meeting and public rally on June 14th at the School of Energy with Four Corners Economic Development sponsorship.
Dr. Fine is the associate director at New Mexico Tech’s Center for New Mexico Energy Policy and the project leader of the Energy Policy and Plan for the state of New Mexico. This analysis is his own and independent of those groups.