On it’s face, the article posted on the MRT website yesterday afternoon by Mella McEwen does not say anything especially prescient about the market forces in the Permian Basin and beyond. Delve just a little deeper, however, and the information is all there.
The article opens with “OPEC’s decision last year to pursue a strategy of maintaining market share rather than upholding prices may have dented America’s shale revolution(,) but (it) didn’t stop it.” As long-time readers (well… more accurately… “reader”) of this blog may recognize, this has been my argument all along. One of the necessary steps in a recessionary business cycle in a commodities market to support a long-term recovery is the capitulation of weaker players. So far, the OPEC price war has damaged many of these players, but has yet to cull the herd sufficiently to restore balance between supply and demand.
As is commonplace in this region, the article then goes on to cite a recent presentation by Tom Petrie, chairman of Petrie Partners LLC, which blames current weakness in WTI pricing on President Obama. Live in West Texas long enough, and you will learn that all problems stem from the decision to elect President Obama. If only the next president would lift the oil export ban, then all would be well in the global oil market! Please pay no attention to the fact that the Brent-WTI spread has continued to narrow throughout this downturn!
Mr. Petrie goes on to say that resuming exports would be “‘initially contentious'” with existing players. Hmm…you think?!? I wonder what a country like Saudi Arabia, whose debt to income ratio would be envied by the entire industrial world, would do if they saw American crude attempting to invade their market share – right at the time when the Saudi ministers decided the entire future of their place in the world depended on maintaining their place in said market. Any ideas? My guess is that they decide that they have not yet inflicted enough pain and so double-down on current efforts to drive these apostates from the market.
Undeterred, however, and contrary to what others (like me) are saying, Petrie argues that the industry is presently endures the darkest night before dawn and that 2016 will be all wine a roses.
You may think first that I am being too hard on Mr. Petrie. You may then look to the title and say, what does any of this have to do about the future?
As to the first part, you are correct. Mr. Petrie is a businessperson in an industry (as I have argued before) that is addicted to incoming investments. He cannot roll out a doom and gloom scenario, and then sit back and wait for the money to roll in. What else is he supposed to say, other than, “It’s just about to get better. I promise!” It’s the line that snake oil salesmen (a term derived from, interestingly enough, petroleum) have said for ages to get people to invest their hard earned dollars in speculative ventures with little hope of return.
As to the second question, it has everything to do with predicting the future. Referring to my discussion above (and before), until we have capitulation of some of the weakest players, we will continue to witness downward pressure on oil prices. Quite simply, there exists a glut of producers on the market. Each time the price goes up, even by a few dollars, these producers flood the market with petrochemicals in a desperate attempt to put together some cash flow… This activity, in turn, means that inventories in the U.S. rise – which forces the price back down to below marginal costs.
Look at the way things shaped in the market over the last two weeks. The price went up… almost ALL the way to $50(!!!) – followed by a collapse to near $43 due to a surprise surge in inventories the very next week (this week).
This cycle will continue until the “dumb money” of new investors is cutoff and these zombies are allowed to starve. Once larger (read, more stable) producers swoop in to buy up the territory held by these weaker companies, the spikes in production will be easier to contain. Thereafter, the market will reach an equilibrium point we can all live (unhappily) with. Until then, however, there is just no good news.
In brief, we will not have seen the darkest hour in the oilfield until we hear the screams of dying companies and the lamentations of the shareholders. Right now, I fear that the sun yet to even set.