If Only These Two Things Come To Pass, Oil Prices Will Rise
http://www.forbes.com/sites/johnmauldin/2016/11/13/if-only-these-two-things-come-to-pass-oil-prices-will-rise/#23ae21bf560aWill oil prices recover as Wall Street presumes? That depends on the balance of supply and demand.
Climate change agreements notwithstanding, the world still burns and will go on burning a lot of fossil fuel. Slowing economic growth has reduced energy demand growth, but the absolute numbers remain strong. This will change as greener technology spreads, but very slowly.
The real mystery is on the supply side.
We know OPEC is trying to agree on production quotas. They will meet this month to make a final decision. I’m not optimistic that they can reach a deal, and I have no illusions that they can enforce any deal they might reach. The vast majority of OPEC members will cheat.
There’s also non-OPEC Russia to consider. Putin is in no position to reduce cash flow right now. The situation is further complicated by the fact that the US shale industry is the pivot point now, filling the role formerly held by Saudi Arabia.
Our companies can dial production up and down quickly too.
Many observers have thought the shale industry would fall, as many debt-laden companies went belly up. It hasn’t turned out that way.
This Oct. 24 Wall Street Journal headline tells the story:
It appears that even bankruptcy can’t make these companies turn off the pumps. From the WSJ:
Energy investors have long hoped that falling prices would solve themselves by driving producers into bankruptcy and stanching the flood of excess supply. It turns out that while bankruptcy filings are up, they have barely impacted fossil-fuel markets.
About 70 US oil and gas companies filed for bankruptcy in 2015 and 2016. They now produce the equivalent of about 1 million barrels a day, about the same as before they declared bankruptcy, according to Wood Mackenzie. That represents about 5% of US oil-and-gas output.
That resilience has kept energy inventories flush and prices capped. Oil shot to $50 a barrel this summer, but has had trouble making much progress beyond that mark.
This is exactly the way chapter 11 was meant to work. The process is designed to save companies that can be saved. And many energy companies are using it to lighten their heavy debt loads, adapt to lean times, and keep producing.
I believe what’s happening here is that people are forgetting the concept of “sunk cost.” If you’ve already spent the money to locate oil and drill into it, pumping it out is not expensive.
Your creditors will want you to do exactly that too, so you can stay current on your payments. Go bankrupt and the court-appointed trustee will order you to pump....