With negative oil demand/supply inversionhaving reached a low point as 2015 ended, there are increasing signs that the red-hot shale expansion, America’s unprecedented energy breakthrough, is in a state of re-evaluation.
When America’s expanding shale patch had shot U.S. daily oil production up to near 10 million barrels a day by mid-2014 up from 4.3 million bpd just six years before, predictions indicated a goal of 15 million bpd with oil prices hitting $100 per barrel, easily outdistancing world leaders Russia and Saudi Arabia, which had reached the ultimate 10 million mark through conventional exploration and production methods.
At mid-year 2014, no one could have predicted Saudi Arabia and its OPEC minions abandoning their “price-fixing,” oil production cutback methods for market-share protection. The simultaneous demand drop-off of Southeast Asia in general and specifically China added additional pressure on OPEC at the fateful Vienna OPEC meeting on Thanksgiving Day 2015 to force prices below the breakeven level for fracking.
The overall oil downward price spiral of 2015 featured a race between severe cost-cutting of ongoing fracking activity to meet the 60% plunge that had been occasioned in 2014’s second half. Despite a temporary upward blip to $60 a barrel (from a 2014 year-end $40 low), the unexpected China demand swoon added deep pessimism to the further expansion, if not abandonment, of much of the ongoing fracking sites.
While the estimated breakeven costs of each barrel of oil has shrunk from the mid-$60s to the high $40s through prodigious price drops in drilling rigs, technical services and stringent employment reductions, the hundreds, if not thousands of smaller, underfunded independent fracking projects are in mortal danger of extinction. This is especially true of the southwest, which houses the huge Eagle Ford and Permian sectors, plus the Bakken Belt, the fracking originator based in the Dakotas.
While U.S. energy giants ExxonMobil, Chevron and Conoco Phillips have their midstream (piping systems, refineries) and downstream (gasoline station retail outlets) to mitigate the exploration and production cost damages, a raft of bankruptcies and project liquidations of independents and their loan agencies could be forthcoming, barring Mideast geopolitical disasters. These could severely impact Saudi Arabia, Iraq and Iran, controlling much of OPEC’s 32 million bpd production. Such militancy would significantly elevate oil prices.
Whatever happens, expect a major showdown and clarification of the world’s energy development future to occur this year.
Widening economic split
The American Supply Association’s Network2015 this past October in Chicago dramatized the unusual split between those manufacturers and distributors involved primarily in the residential/commercial subsector vs. those involved in the industrial arena, primarily energy.
In the many decades of my active involvement in this multi-billion-dollar construction and maintenance-based industry, I’ve never experienced such an inverse level of optimism/pessimism. This was expressed by those involved in the plumbing-heating-cooling segment vs. those committed to the flow control industrial sector (pipe, valves and fittings).
It stands to reason the mainstay of activity represented at the convention would tend to reflect the overall economic direction driving America’s relatively tepid gross domestic product growth.
With 2015 single-family new-home construction attaining its best year since 2007 and multi-story apartment buildings getting increasingly higher rents combined with maintenance and upgrading at a record clip, those involved in such commercial/residential endeavors are doing just fine. At the same time, their industrial brethren, primarily dependent on industrial new construction and expansion, are struggling.
A little more than a year ago, fracking was all the rage, with U.S.-based exploration/production jumping daily oil volume from 4.3 million bpd in the past decade to nearly 10 million bpd most recently. This jumped the U.S. to the world’s top tier along with Saudi Arabia and Russia.
But by the middle of 2014, this energy bonanza had inverted through a combination of Saudi Arabia and Russia, along with OPEC in general, going full blast to protect their global market position. Adding to this challenge to America’s energy outburst was a simultaneous near collapse of China’s blistering growth pace, which savaged demand for most commodities in general.
As 2016 enters its early stages, this ongoing strife for energy superiority has turned geopolitical as Russia has moved forcefully into the Mideast, primarily to stabilize oil pricing — the mainstay of its monolithic exact revenue generation.
With Russia, as well as revived Iran’s oil production representing its government treasury mainstay, current pricing levels, comprising one half of its $100 per barrel budget-planning basis, must be forced up. If military threats aimed at Saudi Arabia are the new Mideast Alliance’s only ultimate alternative, they likely will be used.
Valero: An energy bright spot
An overview of the current oil and natural gas multi-billion-dollar U.S. energy industry sector has generated an overall panorama of pessimism. But when including midstream and downstream, Valero, the owner of the world’s largest and most complex refinery plant, a huge number of brand wholesale sites, plus a producer of ethanol and an owner of gas stations in most U.S. states, Canada, the United Kingdom, Ireland and the Caribbean, it stands out like a shining beacon of light.
Valero’s overall third quarter financial results were “gangbusters.” Its net income soared 30% in the third quarter of 2015 to $1.26 billion vs. $1.06 billion for the previous year’s similar period. Furthermore, Valero’s quarterly earnings per share of $2.79 easily topped analysts’ estimates. It largely beat out the $2 earned at the same time last year.
Valero’s outstanding results were achieved by emphasizing the nation’s largest independent refinery’s increasing net income. This performance, together with the galloping demand for its services from abroad as well as U.S. domestic demand expansion, explains such sterling results.
The dour climate in the arena of exploration and production, controlled primarily by such giants as Exxon Mobil, Conoco Phillips, Chevron, BP and Shell, is in the process of continuing to shed employees by the thousands from the leading producers. This has been especially humiliating since these titans were used to increasing outstanding profit numbers every quarter for many years.
Up until mid-2014, $100 per barrel of light crude oil (West Texas Intermediate) and worldwide Brent crude at $110 were considered long-term post-financial recession standards.
With the unexpected price collapse of both U.S.-based WTI light crude and worldwide heavy Brent crude oil by a 60% price slide in a short six months, the crude oil world has moved to below breakeven levels. This pivot point is today considered a $60 per barrel minimum, even after major employment reductions, technical service cost reductions, and future expansion plans postponed or cut to a minimum.
While the huge oil conglomerates will carry the heaviest fixed load, Valero and those primarily engaged in refining, pipeline transmission and/or retail chains, will come out of the current energy depression far more satisfactorily.
In the meantime, a combination of demand improvement in China, India and Southeast Asia, as well as military confrontation led by Russia in the Mideast will put even more pressure on Saudi Arabia to cut production. These combinations of circumstances will likely move most of 2015’s second-half average per barrel price from $40-45 to a more acceptable $60 by the end of the first quarter 2016.
When Dow Chemical Co. reported blistering strong third-quarter financial results this past October, it became readily apparent that this multi-billion-dollar chemical giant had already benefitted mightily from returning a growing amount of its production facilities to its American homeland.
As previously anticipated, the fast-growing availability of U.S.-based liquid natural gas this past year, a main commodity staple of Dow’s massive end-use development, was more readily available and far cheaper than could be embraced in other low-cost, low-tax sites to which Dow had moved an increasing percentage of its capacity in the last two decades.
In celebration of its third quarter profit achievements, replete with near-record revenues and profits, Dow announced a major stock buyback and increased dividends for its investors.
As previously predicted, the ongoing construction of liquid natural gas conversion facilities in conjunction with export capability to distribute the vast waves of LNG being excavated, have benefitted from oil fracking as it continues its expansion; this despite the massive oil glut that has kept prices at half the level that crude oil — foreign and domestic — enjoyed until the start of 2014’s second half.
In the case of natural gas, the price per 1 million Btu (its international price formula) has been cheaper here than anywhere else in the world, consistently below the three-dollar level. It has stayed in that range, as it had become practically superfluous when liberated along with crude oil, as fracking expanded geometrically.
While a meaningful oil price recovery could take years rather than months, liquid natural gas only awaits the urgently needed completion of LNG conversion and export facilities that could unleash its cheap LNG on most of the world’s developed nations, whose current prices are far higher than the U.S. pricing presently available.