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.

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This time is different. Those four words have cost investors, corporations and governments untold sums over the years. Right now, oil and gas industry strategy is being driven by the mantra of “capital discipline.” A recent industry survey points to interesting trends about the industry with ominous implications for the future of the business. The industry structure is shifting with large companies increasingly driving activity. They are shifting their focus to reflect long-term positive trends for natural gas and renewables. Will the market reward those moves or urge embracing “animal spirits” one more time to drive activity? The world is supposed to be saved by the Millennials given their attitudes toward EVs, AVs and ride-hailing services. An MIT economist involved in that institution’s transportation mobility research suggests none of these beliefs is true. January was good for crude oil and bad for natural gas prices. Will the “January effect,” associated with the remainder of the year’s stock market performance have any parallel impact in commodity markets?

A new survey of auto execs claims they overwhelming believe battery electric vehicles will fail commercially. They believe hybrid and fuel cell technologies are the paths to a cleaner transportation market. Their comments about different issues with EVs and AVs offer sobering thoughts about the conventional view. California’s governor dreams “big” about the future of zero emission vehicles in his state. His goal of five million ZEVs by 2030 implies a 40% ZEV sales rate in 12 years, up from 5% now. Another big budget expenditure for the state’s residents to fund. Canada’s oil and gas industry is in the middle of another political brawl between British Columbia and Alberta, with the Canadian federal government playing a role, too. Its outcome will shape the industry’s future, and interestingly, government revenues for the future.

Investor returns from owning energy shares have lagged the performance of the overall stock market for a long time, even though energy was the top performing sector in 2016. The extended period of poor performance reflected investors’ realization that energy company profitability was a risk well before the 2014 peak in oil prices and subsequent crash. Producers outspending their cash flow was acceptable to investors prior to 2011, but since then not so much. Could Andy Hall and Boone Pickens shutting their respective oil trading and energy hedge funds down in the past six months have signaled the bottom for oil prices and energy share prices? The bitter cold temperatures in New England earlier this month showcased the dramatic impact weather can have on energy prices, especially in a region that is capacity constrained for cheap natural gas. New England environmentalists blocking new and expanded natural gas pipelines to supply the region are condemning residents in the region to increased energy poverty.

The recent consumer and auto shows highlighted autonomous vehicle technology, while ignoring electric vehicles. Is that because one technology is new and sexy, while the other is now mainstream? Importantly, the future for EVs now is more in the control of regulators than consumers. Predicting that future cannot be done without contemplating how shifts underway in the global transportation market will reshape it. Germany’s green revolution is showing signs of structural problems as the increasing volume of renewable energy is driving residential power costs up sharply. Moreover, utility company embrace of more renewable power is working to the detriment of German’s carbon emissions goal and potentially its leadership role within the EU.

Any good industry newsletter is obligated to present an outlook for the upcoming year, even if you are unsure. We offer commentary on the key trends we believe will shape the trajectory for oil prices in 2018 and beyond. Bottom line, we see higher oil prices (mid-$50s to $70 a barrel) this year with an improved psychology within and about the industry shaping activity and share prices. In our view, the bias is for oil prices to go higher, rather than lower, than people’s expectations. Prices might not go as high as the true bulls anticipate, but, they could stay elevated (the high end of our range) longer than expected due to the damage done to the long-term oil supply outlook by the cutbacks in capital spending and drilling over the last three years. Higher prices and increased government intervention in energy markets will impact demand trends, which is the other side of the equation for determining future oil prices. For example, France just banned oil exploration in its country and throughout its worldwide territories. The action will have minimal impact on the county’s supply and demand, but it cements France’s leadership in the environmental parade against fossil fuels. Another example is NY Gov. Cuomo who wants to push forward on developing extremely expensive offshore wind power. He needs the federal government’s help, but even the most optimistic timetable leaves him short of replacing the 25% of NYC and surrounding counties’ power that results from the Indian Point nuclear plant shutdown scheduled for 2020-2021. Will this position help him in his re-election and presidential ambitions?

Autonomous vehicle development is moving ahead rapidly, but one hurdle yet to be overcome is whether they can operate in snow storms. Until they prove it, their market attraction will be limited to “fair weather” states. Will they be able to demonstrate success? Probably, but the bigger question is: Will the public feel safe in these cars? How well does Bluetooth work connecting your cell phone in your car? Increased capital discipline and a lack of oil discoveries will shape the oil market in 2018. This could leave the industry staring at $70 a barrel oil prices. If prices stay there for long, look for “animal spirits” to begin driving the actions of E&P execs. While the bomb cyclone storm drove the natural gas market crazy, traders aren’t buying a sustained recovery as they see continued production growth and limited demand increases. LNG exports remain the wildcard in this market.