Brent crude is trading at more than $100 a barrel, WTI has surpassed $90, but oil drillers in the world’s largest producer are cautious about their future plans. In fact, they are quite unhappy with the war in the Middle East, because it has made investment planning difficult.
At first glance, everything is perfect, price-wise. WTI is trading much higher than shale drillers need to be profitable. According to the latest Dallas Federal Reserve Energy Survey, the range of profitable WTI drilling price levels for the oilpatch is between $62 per barrel for non-Permian shale, $68 per barrel for conventional oil, and $70 per barrel for parts of the Permian. However, only 21% of respondents said they planned to significantly increase the number of wells they plan to drill this year.
According to a recent Wall Street Journal report, the reason is uncertainty. The report said that in private conversations with senior federal government officials on the sidelines of CERAWeek, oil and gas executives had demonstrated growing concern about the situation in the Middle East and its impact on global energy security. According to the report, energy executives were increasingly frustrated with the messages coming out of Washington and were unwilling to share the optimistic tone of most of those messages.
“What they don’t understand is that daily tweets that create volatility in both the commodities market and the stock market are not good for anyone,” Kimmeridge managing partner Mark Viviano told the WSJ. “It’s really difficult to make smart decisions in that environment,” he added.
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Meanwhile, a Dallas Fed energy respondent commented on the situation this way: “I think our operators are going to take a wait-and-see stance on ramping up drilling plans to see how oil and gas prices perform over the next six months. We could all use what could be a short-term increase in cash flow to repair balance sheets, reduce debt, and get caught up in deferred but necessary capital expenditures, operating expenses, and overhead expenses in addition to drilling.”
In other words, the price rally is making the industry nervous, but the extra cash isn’t unpleasant. The big question, of course, is how long the crisis will last, because the longer it lasts, the worse the consequences will be.
“There are very real physical manifestations of the Strait of Hormuz closure that are making their way around the world and through the system that I don’t think are fully contemplated,” Chevron CEO Mike Wirth said at CERAWeek, to put it mildly. In fact, fuel shortages are already starting to emerge in some Asian countries and, surprisingly to some, in Australia.
It’s perfectly normal for oil and gas executives to worry about the impact of war on the price of the raw materials they sell. After all, high prices are a good thing, but only up to a point. That point comes when prices rise too high and begin to kill demand for those commodities. As Billy Bob Thornton’s character in “Landman” put it, “You want oil to be above 60 but below 90. And don’t get me wrong, we’re still printing money at 90, but…gasoline goes above $3.50 a gallon, it’s starting to get scarce.”
In fact, Ed Ballard of the Wall Street Journal argued in a recent report that the jump in LNG prices could be problematic for U.S. exporters. Ballard cited a recent comment by the CEO of Freeport LNG that said, “It’s a scary thing, it’s not good for our industry,” referring to such a price jump, which has already caused some importers in Asia to switch to coal because it is cheaper. Meanwhile, Europe and the rest of Asia are trying to outbid each other for any LNG cargo leaving the U.S. Gulf Coast. For now, it appears the Asians are winning: About a dozen shipments originally destined for European buyers have been diverted to Asia over the past month. However, analysts warn that it is only a matter of time before demand destruction begins.
“A global gas market that was expected to be oversupplied (and cheap) will now be undersupplied (and expensive),” Eurasia Group said in a recent note, cited by the Wall Street Journal. In fact, LNG in the spot market is selling for $24 per mmBtu, Pakistani officials said recently, comparing this figure to $9 per mmBtu under the country’s long-term agreement with Qatar, which Qatar is currently unable to service.
In the oil sector, the consensus seems to be that things are not so bad. However, that doesn’t mean they aren’t bad, as some responses to the Dallas Fed survey suggest. “The Strait of Hormuz adds complexity. Suppliers are already trying to raise prices, and the administration continues to try to lower (oil) prices. How sustainable are current oil prices? It’s difficult to make long-term commitments or ‘drill, baby, drill,'” one respondent said. Another put it more succinctly: “Everyone hopes and prays for a quick end to the war.”
By Irina Slav for Oilprice.com
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