Geopolitical and economic events of the past couple of months are creating significant challenges for the energy business. In fact, the collapse of global oil prices leading into the OPEC meeting of December 6th, raised fears of a repeat of 2014-2016. There have been many explanations for the oil price drop, but they typically deal with near-term trends and resolutions. We step back and begin an examination of the similarities between the 1970s boom years and the following decade-and-a-half’s aftermath. The oil and gas industry that enjoyed the boom was not the same industry we saw when the next industry cycle began. Is it possible that the most recent 68 months of real oil prices above $90 a barrel is creating a similar massive restructuring of the energy business as happened in the 1980s? If so, then we should be preparing for years of change that will produce a radically restructured industry compared to the one we see today. History doesn’t repeat, but we should pay attention to its rhymes, for they may tell us much about where the energy business is heading, and importantly, who may win and who might lose.
Canadian oil prices have surged in recent days following the aggressive step by Alberta Premier Rachel Notley, when she ordered a nearly 9% production cutback in the province’s oil output. After failing to stimulate oil prices with an earlier announcement of province’s purchase of locomotives and tank cars to increase the shipments of oil-by-rail, the OPEC-like move is seen as a more realistic solution, but is actually quite reactionary. It will not make all Alberta producers happy, as some were enjoying the increased profitability of their downstream operations with low wellhead oil prices. However, the enjoyment came at the expense of the health of the industry, and reflectively, that of the province, as both were being sapped of income with deleterious impacts for the future. We will see how whether this move creates further waves within the political arena as 2019 brings a number of key provincial elections, and a political judgement on the Justin Trudeau leadership. Just how will the Alberta oil industry react longer term?
The EIA declared that the U.S. had become a net total oil exporter for the first time in years. This prompted numerous media stories about the dramatic change in the nation’s energy status and outlook. Without taking too much away from the significant progress the country has made in reducing its oil imports, while growing its crude oil and refined product exports, the week’s achievement may have had more to do with the timing of loading and unloading tankers at the LOOP offshore oil port than being a permanent change. LOOP has become much more efficient in loading super-large tankers, and it enjoyed a week with virtually no tankers to be unloaded. Much as Gulf Coast fog often distorts weekly oil import data, the week of “energy independence” may reflect a similar event. Let’s hope, however, that this one week event actually becomes a regular occurrence, something the domestic oil and gas business will relish.
Several forecasts for end-of-winter natural gas storage volumes suggest the nation will be approaching the lows only seen a couple of times in the past decade or so. These forecasts come with gas prices well above $4/Mcf, but gas storage trailing its 5-year history by a healthy margin. Does the gas storage situation reflect a belief that global warming will dominate the upcoming winter’s weather? Maybe. Those who embrace that scenario would be wise to examine weather forecasts suggesting much of North America will experience cooler than normal temperatures from December through May. The only way to build more storage is for gas prices to rise higher, something not now contemplated by the futures market. Sharply higher gas prices could be the surprise of this winter.