This article was published by The McAlvany Intelligence Advisor on Monday, July 1, 2019:
There’s an old saying in sales and marketing: “There aren’t too many problems that can’t be solved by sufficient production.” Donald Trump is learning that it also applies to production of crude oil and natural gas. Sufficient production solves many problems.
For one, he delivered a clear and distinct message to Middle East oil producers when he pulled his punch last week and canceled a military response to the shooting down of a U.S. drone surveilling the Strait of Hormuz: “You’re on your own, boys. There’s not enough oil flowing through the Strait headed for the U.S. to make it worth the risk. You’ll have to police the area yourselves.” Not in so many words, you understand, but some messages are best delivered indirectly.
Two recent reports confirmed the preeminence of the United States in its production of crude oil and its related derivative, natural gas. Earlier this month, British Petroleum (BP) released its “Statistical Review of World Energy” for 2019 in which it reported that the U.S. extended its lead as the world’s top oil producer to a record 15.3 million bpd (barrels per day): 11 million bpd of crude and 4.3 million bpd of natural gas liquids (NGL) in April.
BP added that the U.S. led all global oil producers by increasing its production by more than 2 million bpd in 2018, 98 percent of the total new global production.
Friday’s report from the U.S. Energy Information Agency (EIA) overshadowed that from BP, noting that in April the U.S. produced 12 million bpd, with estimates that that number will approach 20 million bpd in five years or less.
The implications flowing out of the fracking revolution in the U.S. continue to astonish even casual observers. First, as Robert Rapier noted, writing for OilPrice.com, “Without the U.S. shale oil boom, oil prices would have never dropped below $100 a barrel.” Translation: without the fracking revolution, gas would be selling for more than $4 a gallon, rather than $2.60 a gallon, the current U.S. average.
Second, the U.S. is enjoying almost complete self-sufficiency by producing nearly all the oil and natural gas the country needs. The only imports are of heavy crude that now come largely from Canada. The bulk of that heavy crude used to flow through the Strait of Hormuz, but that flow has slowed to a trickle: about 1.5 million bpd. To put that into perspective, the world’s energy companies produce around 100 million bpd.
Its position on the catbird seat also means that the threats by OPEC – which just announced that it will extend its production cut of 1.2 million bpd well into 2020 – mean little. OPEC used to be the big dog in the global market, manipulating output as the cartel wished, without concerns about other producers’ ability to offset its machinations. Those days are over, despite the announcement on Saturday. Interestingly, it was Russian President Vladimir Putin who made the announcement at the G-20 meeting in Osaka, Japan, and not a spokesman for the usual leader, Saudi Arabia. Said Putin: “We will support the extension, both Russia and Saudi Arabia … we will support the continuation of the agreement … in both Russia and Saudi Arabia … in the volumes previously agreed.” The OPEC meeting, which takes place on Monday and Tuesday in Vienna, is expected to rubber stamp Putin’s announcement.
In the past, such announcements would have rattled the markets and driven oil prices higher. Instead, world oil markets just yawned.
While oil prices have jumped lately, the underlying cause isn’t economic but political. Sanctions on Iran and Venezuela – formerly among OPEC’s largest producers – have resulted in severe supply disruptions. But U.S. oil shale producers are making up the difference, which may explain why oil prices fell off on Friday.
That is not to say that that industry isn’t without its problems. Rystad Energy reported in May that, out of the 40 top U.S. oil shale companies, only four are showing profits. That fact is causing energy investors to pressure fracking companies to turn a profit soon or lose their financing. Rystad made clear what’s at risk if they don’t: “With negative cash flows, shale companies have historically relied on bond markets to finance their operations. Without additional funding [however] … capex [continued investments in developing new production] will be cut.”
Alisa Lukash, Rystad’s Senior Analyst, pointed out the size of the gap these companies have created between revenues and expenditures: “The gap between capex and [cash flow from operating activities] has reached a staggering $4.7 billion. This implies tremendous overspend, the likes of which have not been seen since the third quarter of 2017.”
But the free market works to correct poor investment decisions. There’s nothing like the threat of cutting off the supply of funds to get a fracking company’s management’s attention. Expect those corrections to be made, thus ensuring that America’s new role as the world’s leading energy producer is permanent, continuing to solve many problems.
Finance.Yahoo.com: U.S. Oil Output Tops 12 Million Barrels a Day for First Time