Oil Prices Just Hit A Four Year Low

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ithin a day of the announcement, OPEC announced it would increase production by an additional 411,000 barrels per day. Industry experts differ in opinion on whether it was the tariffs or OPEC which had the greater impact on the recent drop in prices. There’s also considerable debate on what OPEC hopes to accomplish by dumping more oil on the international market that’s already experiencing a lot of downward pressure. 

Most experts agree that the low prices will result in a reduced oil output, and if the situation continues, it could potentially spell problems for the industry. 

✪ Build, Baby, Build

Prior to Trump’s victory in the November election, experts were doubting that America would see any increases in oil production. The Biden-Harris Administration created an extremely hostile regulatory environment for the oil and gas industry, but many of the rules impacted long-term investment on upstream investments, which is the exploration and production aspect of the industry furthest up the supply chain from the end consumers. The time lag involved meant that impacts on production were expected to be realized over the next few years. 

While the Trump Administration wants to see oil prices down to $50 per barrel, some experts argue the industry isn’t likely to survive with prices that low. David Blackmon, an energy analyst who publishes his work on his “Energy Absurdities” Substack, says $60 per barrel West Texas Intermediate, which is the American benchmark, is well below the break-even prices of most shale plays, which is the price producers need to be over in order to turn a profit. 

“My view has always been that we weren’t going to have a big drilling boom in this second Trump presidency,” Blackmon said. 

Blackmon explained that the U.S. oil and gas industry, which has seen production rates explode as a result of hydraulic fracturing technologies, has matured over the last decade. The progression of oil development, he said, begins with an initial boom. Then, as companies drill out formations, they look to improve processes. “That’s the phase we’re in now,” he said. 

If the price remains low for an extended period, Blackmon predicts, we’re likely to see layoffs in the oil and gas industry. With drilling rigs and frack crews idle, well-service industries will see the first impacts. However, the industry will likely look to further investment in infrastructure, such as pipelines, which will create some jobs in other sectors. “It’s what I call the ‘build, baby build’ phase,” Blackmon said. 

✪ Trade Deficits Could Worsen

In the wake of Trump’s tariff announcement, both Goldman Sachs and JP Morgan, Reuters reported, have raised the risk of recession. If that happens, it would bring down demand for energy. Andy Fately, principal at FSX Hedge Consultants, argued on his “FX Poetry” Substack that we may be heading into a long-term period of low oil prices. Fately wrote:

“Remember, if energy prices decline, that reduces cost pressures for the entire economy. And here we are this morning with oil (-4.0%) breaking below $60/bbl and down -10% in the past month. Despite all the headlines that tariffs are going to raise prices, this is something that will clearly offset any general rise in price pressures.”

Robert Rapier, a chemical engineer and editor-in-chief of Shale Magazine, told Just the News that the economic playing field in the U.S. has changed and low energy prices won’t have an overall positive impact on the economy as they did 20 years ago. Rapier said:

“Today we are a net exporter of oil and finished products. That means when oil prices go down, it actually worsens our trade deficit. We are getting less money now for our net exports. Trying to fix this with tariffs, if you drive oil prices down, you’re going the wrong direction there.”

He said some industries will benefit. The airline industry, for example, will enjoy lower fuel costs, but overall he said the importance of the U.S. energy industry today will blunt the positive impacts. “And sustained lower prices are not good for the energy industry,” Rapier said. 

✪ Uncertainty May Discourage investment

The oil and gas industry, he said, is experiencing a lot of uncertainty with Trump’s tariffs, which is going to discourage investment in drilling. “The oil industry is very conservative. They are already expressing concern about not knowing which direction these tariffs are going to go and how that’s going to impact them,” Rapier said. 

OPEC, meanwhile, sees an opportunity in this low-price environment to potentially force some players out of the market and regain some of their share. In 2014, OPEC had a similar strategy when the U.S. shale industry produced an oil boom. 

Rapier wrote about OPEC’s trade war with the U.S. in Forbes in 2016, a war the organization decidedly lost when the shale industry continued to grow. Things have changed, Rapier said. The shale plays are beginning to flatten out and the sweet spots with low break-even prices are getting exhausted. With the outlook poorer than in 2015, OPEC is thinking it could push some producers under by adding to an overburdened market, he said. 

✪ Shale Producers To Unseat OPEC

“Doomberg,” a top finance publication on Substack, had a different take on OPEC’s decision to increase production. The Doomberg analysts argued in “Punctuated Equilibrium” Monday that OPEC existed to keep oil prices higher. Its refusal to acknowledge the reality that shale producers unseated the cartel as the market steward has only hastened OPEC’s unseating. Its decision to flood the market was more of a surrender, the analysts argue, than a strategy to regain its control of the market. 

Trump had sought to lower oil prices, and the Doomberg analysts say he just might see $50 per barrel oil prices. Experts differ on how this will play out, and Trump’s policies could become a test of how much low energy costs help or hurt the economy. ✪

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