The Price of Oil

It’s been about 3 months since I accepted my employers Voluntary Reduction in Force Program offer. It just seemed and appropriate time to move on and let the next generation take the helm. Especially given what you will read below. 

Yet I doubt I’ll ever really leave an industry I spent 43 years participating in. It’s stays in your blood thus this break from my normal blog subjects. This one will focus on “The Price of Oil” and what it means. 

Every morning I awake to a hot cup of coffee and the Houston Chronicle. Not the best paper on the world in my opinion. Not like the LA Times or the Wall Street Journal by any means. But I do like to take a look at Chris Tomlinson’s daily articles in the business section. Articles like: Relative Relief Comes to the Oil Patch where he wrote:

“Have you ever noticed how much warmer 40 degrees feels compared to 30? The perceived difference between subfreezing temperatures and the 40s can feel like the difference between misery and comfort. But no one would ever call 40 degrees warm. That’s how the embattled oil patch will feel in 2017, warmer, but still cold, according to two prognostications.”

This article struck a chord with me. I knew the price recently has been rising. But I also know that we only started hearing about the firming of price after news Russia & OPEC came together and reached an agreement. - Which seems a bit ironic in that Russia and OPEC have historically never been consistent or even trustworthy for very long.

The article drove me to do a little old fashioned checking of my own. Take a look at the price of oil for the past 3 years - Per Bloomberg. Consider that in November 2016 the OPEC and Russia agreement was reached and oil prices began to be reported as moving upward. Yet look at recent price history. Prices were touching $50bbl in June of 2016 well before any production agreements. Today (1-15-17) WTI (West Texas Intermediate) is trading in the $52 Bbl range. About where it was back in May of 2016.  This was not, in my mind, a signal that we have turned a solid corner, especially given the massive amount of shale oil in place in the US that has not been tapped.

Tomlinson’s next comments say: “But the wild card is what U.S. shale producers will do when prices inch up. “In other words, while OPEC has set the floor on prices, U.S. shale will set the ceiling, said Paul Hickin, oil editorial director for S&P Global Platts, an energy data analysis firm. “Compliance to the deal until the stock overhang disappears ... will be pivotal to ensuring the price floor holds,” Hickin said. And how fast the U.S. shale industry comes back “will determine how low the ceiling becomes,”

As a Field Manager in Alaska, California, The Rockies, and Mid Continent I watched the price of oil but I didn’t look at it closely unless it had begun a sustained downward or upward trend. This held true later in my career when I became responsible for Field Service Technician Training globally.

In those days I needed to hear what my customers were saying. I needed to have some idea what next year was going to look like. Would we need to double up on our recruiting? Would I find my trainers looking things to do? How would I keep them active, happy and providing true value to our internal and external customers? Over the years I found the crystal ball was clear for only short time frames driven mostly by orders and demand.  

Amazingly today, I don’t see the mainstream news talking much about Shale. I hear a great deal more about the hope an agreement between OPEC and Russia seems to have instilled in our industry and the news media. It seems that the good news somehow is overshadowing the dynamics of the upstream oil and gas business, Supply vs Demand.

Take a look at prices adjusted for inflation since 1970. Think critically. What do you see?

In 45 years how many major drops in price do you see? Think big picture. I count 7. 

Now take a look at the inflation adjusted price that held for the longest time frame. My eyeball, ball park rough estimate says the median price adjusted for inflation was around $38 bbl between 1985 and 2001. 

Try it yourself - make your own estimate.

Bottom line, the median price that lasted the longest lasted for about 20  out of 40 years. We saw a sustained period of relative stability. Well except for that little drop in the late 90’s.  

Now to the point:

Predicting the future price of oil is virtually impossible. Yet if your responsible for a team or a business you have to attempt to make an educated judgement. That means using facts and others opinions to develop your own gut feeling.

Personal opinion – Oil is going to stay in the $45-$60 bbl. range for a while to come. Disruption of supply will make it head racially up quickly. News of overflowing storage tanks and ocean transport tankers will cause it to go down. Yet the dynamics of history point to another period of relative stability.

Look at the long term graphs again. The boom of the 1970’s resulted in a bust and then long term stabilization that lasted until about 2001. Relative price stabilization is probably going to occur for at least the next 3-5 years. Not bad, not a boom and not a bust, just healthy relative stability. And maybe just maybe just enough time to allow for the next Generation to become seasoned enough to sustain the business safely when the next boom does come.

And if you are in the ranks of those that have lost their jobs in the industry in the past 3 years, you may do well simply giving up on the oil industry and choose a new segment of our economy to work in. Better yet, go back to school and increase your knowledge and skills if you can.

As a footnote:

On 1-15-17 Colin Eaton also of the Chronicle wrote: 

“prices for futures have oil capped at $56 bbl out through 2020”. “They’re thinking the more prices rise, the more US production is going to come on and balance things out.”

Finally, someone has said it. But is anyone listening.