Monday, February 15, 2016

Oil Industry Outlook - Weak Short Term - Better Long Term

This article in the UK Telegraph is one of the better ones I have seen that explains why the low price of oil will not destroy the shale industry in the US. The economic reality is that the reserves will still always be in the ground. If the companies currently producing the reserves go out of business, new money will simply acquire the reserves for a lower price and eventually produce them. Below are some quotes from this UK Telegraph article, then some added comments.

"Hedge funds and private equity groups armed with $60bn of ready cash are ready to snap up the assets of bankrupt US shale drillers, almost guaranteeing that America’s tight oil production will rebound once prices start to recover.
Daniel Yergin, founder of IHS Cambridge Energy Research Associates, said it is impossible for OPEC to knock out the US shale industry though a war of attrition even if it wants to, and even if large numbers of frackers fall by the wayside over coming months.
Mr Yergin said groups with deep pockets such as Blackstone and Carlyle will take over the infrastructure when the distressed assets are cheap enough, and bide their time until the oil cycle turns."
. . . . . .

"Zhu Min, the deputy director of the International Monetary Fund, said US shale has entirely changed the balance of power in the global oil market and there is little Opec can do about it.
“Shale has become the swing producer. Opec has clearly lost its monopoly power and can only set a bottom for prices. As soon as the price rises, shale will come back on and push it down again,” he said.
The question is whether even US shale can ever be big enough to compensate for the coming shortage of oil as global investment collapses. “There has been a $1.8 trillion reduction in spending planned for 2015 to 2020 compared to what was expected in 2014,” said Mr Yergin."
My added comments: Points to take from this article in my opinion:
- low oil prices do not put an end to the US production of shale oil, they just delay them
- new money is sitting on the sidelines just waiting to buy up shale oil reserves at lower prices - so the reserves just move from small independents to larger entities
- the current too low price of oil mostly hurts smaller companies, retiree oil royalty owners who depend on oil royalties, state and local taxes used for schools, Indian tribes in the US who depend on oil royalties, and the thousands of oil workers who lose jobs --- large oil companies take a short term hit but will emerge with even more of monopoly hold as smaller independents go under 
- the low price of oil sets back the steady move towards the increase in renewable energy sources (solar, wind, etc) because it makes those energy source non competitive against too low oil prices
- the current low oil price also works against the efforts of virtually all the major central banks to get some inflation (and stave off serious deflation)
In the short term, consumers and importing nations will benefit from too low oil prices, but will eventually pay a price for it because as production is shut in and new wells are delayed to maintain supply, the market will eventually revert back to being under supplied. This will cause a very sharp move higher in oil prices later. The creates a volatile roller coaster effect on prices which does not really benefit anyone.
We are really all better off if oil prices stay in reasonable price range from $60 to $80. This price point range allows everyone to plan properly to keep supply and demand in balance and also encourages the steady continued increase in renewable energy resources which we are going to need as world demand for energy will always continue to expand as population grows.

Added note: Nomi Prins talks about coming stress in the oil industry in this new interview.

No comments:

Post a Comment