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.

The issue of how much new shale oil output can come from a revitalized U.S. drilling effort will determine future oil prices.  More drilling in response to higher oil prices, and hopes for even higher ones in the future, combined with reduced well breakeven costs due to better drilling and completion technology will help drive higher output.  Better rocks, greater rig efficiency and improved economic ultimate recovery metrics are powering this revival, but with they continue?  We explore how these developments could disrupt the march to higher oil prices.  UPS drivers studiously avoid making left-hand turns.  Surprisingly, driving further to avoid making left hand turns can actually save gasoline.  We look at the results.  Crude oil prices are more than just a reflection of supply and demand.  They are also influenced by measures of oil-price volatility as well as shifts in the value of the U.S. dollar.  The current environment for these factors resembles 2009-2010, at the time oil prices began heading toward $100 a barrel.  Could that happen again?

Commodity traders are starting to pull in their bullish horns, which shouldn’t be a surprise.  Interestingly, European oil traders/speculators, although still bullish, are less aggressive than they were in early 2014 as oil prices approached their peak and then collapsed.  Should we be watching what they are doing to forecast oil prices?  Crude oil prices have been supported by the historically high OPEC production cut compliance in January.  One forecaster sees U.S. oil output ramping up to record levels in the next five years without oil prices reaching $80 a barrel.  As Americans gain weight, car safety experts have to use larger crash-test dummies to study injury risks.  What would happen to small car demand in this country if Americans go on a diet?

The role of the automobile in the world’s future transportation system will determine the amount of gasoline and diesel fuel needed, and in turn the amount of oil required to produce the fuels.  Impacting this outcome will be the share of the global vehicle fleet represented by electric and other non-gasoline and diesel powered vehicles.  We examine both the BP and ExxonMobil views on this topic along with reviewing recent trends in the U.S. auto transportation sector.  In anticipation of higher oil prices later this year in response to the OPEC/NOPEC(non-OPEC) production cuts, crude oil traders have placed their most bullish bet on that occurring in the last decade.  Interestingly, in past periods of peak optimism, traders often faced falling oil prices shortly after their bullish bets were placed.  Will that happen this time?

Low natural gas prices are driving coal from the electricity generating market and will potentially drive nuclear out, too.  But there are other dynamics at work shaping the nuclear industry outlook such as the push for more electricity generated by renewables.  We examine the latest nuclear power battle in New York State where Gov. Cuomo is working to get the Indian Point nuclear plant located near NYC closed by 2021, 14 years ahead of its license expiration.  The problem for New York power consumers is that this plant accounts for 12% of the state’s electricity supply, an amount that wind and other planned green energy sources will be unable to replace, leaving customers facing skyrocketing electricity prices and at risk of an unstable grid ensuring increased blackouts, i.e., the worst of both worlds.  As with many issues impacting the power market, this battle over the future of 20% of America’s power that comes from nuclear is well below the radar screen.  Finally, we review the BP 2017 Energy Outlook as it offers some interesting and confounding views about the future of the energy business, and the oil and gas markets, in particular.

A key ingredient impacting 2017 oil prices will be the value of the U.S. dollar, something President Trump has focused on recently.  His comments drove the dollar’s value down by 1% last Tuesday.  It is interesting to see what the dollar/oil price relationship was during the 1980s and 1990s as a potential precursor for the future.  If we repeat that pattern, look for oil prices to remain in a fairly tight range for a number of years, contrary to a number of forecasts.  Two federal judges have slammed government agencies over their abuse of the “rule of law,” something likely to change under the new administration.  Both the EPA and BSEE were admonished to follow the laws they operate under and to stop making new laws.

Crude oil was the best performing asset class in 2016, but that didn’t lift it from last place for the 2007-2016 decade.  In fact, if you owned oil over that decade you actually lost money, the exact opposite of the prior decade’s results.  Where might crude oil rank in the coming decade?  A recent study showed that a handful of integrated oil companies generated more than the lion’s share of the entire oil industry complex’s free cash flow.  Are integrated oil companies the best (or safest) way to invest in the energy business?  With the Chevy Bolt being selected as the 2017 North American Car of the Year, auto industry thought-shapers (journalists) have unofficially designated this as the year of the Electric Vehicle.  Will it actually prove that significant?

With the holiday season and then traveling half way around the world, we wrote a slightly different Musings.  In keeping with our recent theme of cold weather being worse for humans than hot temperatures, the EPA is now focusing on shutting down Alaskans’ wood-burning stoves to address minor smog issues caused by wood-burning stoves.  This is the least costly and most used method for heating homes in an energy-disconnected infrastructure, but that doesn’t seem to bother the regulators.  At the same time, a respected Russian climate researcher has demonstrated with his acclaimed and highly rated climate model how a new Little Ice Age has commenced.  This is a media world obsessed with global warming.

The energy themes of 2017 will likely be the same ones we were focused on in 2016.  In that regard, understanding more about electric vehicles is helpful, but the scariest thought was expressed by the portfolio manager of the New Era Fund who says this commodity downturn could last for a decade!  Is his view what “lower for longer” means?  We also have a brief review of the crude oil and natural gas markets for 2016 and what 2017 might hold.