BY G. ALLEN BROOKS, MANAGING DIRECTOR

 

Musings from the Oil Patch reflects an eclectic collection of stories and analyses dealing with issues and developments within the energy industry that have potentially significant implications for executives operating oilfield service companies. The newsletter is published on a semi-monthly schedule, but periodically the event and news flow may dictate a more frequent schedule. As always, we welcome your comments and observations.

(click on image below to download full report)

The next issue will be published on January 22, 2019.

We continue our examination of oil industry cycles. In Part 2, we consider issues such as the value of the U.S. dollar and interest rates on oil prices, as well as transportation fuel dynamics and the trading performance of energy stocks. Halliburton’s history as a public company provides us with a long record of its share price and EBITDA – 46 and 24 years, respectively. Its share price performance and earnings results confirm how much energy stocks trade on future expectations. We also looked at the push for clean energy vehicles and their cost on energy’s macro outlook. Transportation fuel demand is key to the future of the oil business, especially in developed economies. Whether the transportation market is radically altered, or only evolves slowly will impact global oil consumption, especially as the dynamics of energy varies in economies around the world. History offers an important perspective for looking into the future, which is why we examine past cycles to better understand what drove them and what lessons we may learn for understanding future cycles.

The enigma of natural gas prices in the face of historically low gas storage volumes and surging output continues. Have gas traders bought into the global warming scenario that would reduce our need for large gas storage volumes to meet winter demand, especially given the continuing surge in associated natural gas output from the Permian Basin? The global warming thesis will receive a test this winter, as outlooks are split between those predicting a warm winter and those calling for a cooler-than-normal to a bone-chilling one. With gas prices having dropped below $3/Mcf at year-end due to an expected warm January, the question becomes: What happens if the warmth fails to materialize?

The energy market in Alberta is feeling better about its 2019 outlook – at least that is the message from oil prices. The price differential between WTI and WCS has contracted significantly following the province’s move to mandate a production cutback. This OPEC-like move, not employed since the 1980s oil price crash, will reduce supply by 8.7%, or 325,000 barrels per day. Hopefully, the cut will bring down bloated oil storage volumes quickly, allowing oil prices to rise. The price battle reflects the problems of the Canadian government’s energy policy and its failure to get several critical oil export pipelines built, while pushing for a nationwide carbon tax. The struggle also reflects the battle over oil company business strategies to either become fully integrated or remain merely a seller of oil production. Energy’s travails, hurting the largest industry in Alberta and in Canada, are playing out against the political backdrop of a growing “separatism” movement in the province and the upcoming re-election effort of liberal Rachel Notley. A shrinking price differential will ease Alberta’s pain, but maybe not end its war.

The Dallas Federal Reserve Bank’s survey of the local Texas energy economy shows it hit a huge pothole in the fourth quarter. Driven by the collapse of oil prices and the growing uncertainty about the price in 2019 and thereafter, energy job losses are mounting with many more jobs at risk. Should we worry, or is oil about to experience a huge rebound?