During the course of a radio appearance I made on January 29 (BYU Radio’s “Top of Mind” program hosted by Julie Rose) I was reminded of just how little most Americans really understand about oil and gas in general, and how the gasoline or diesel they use in their cars is manufactured and delivered to their local gas stations.
That’s not a criticism of ordinary Americans, because 98% of them have no real need to understand such things in the course of their lives, and our system of education does almost nothing to educate them about this particular topic. Nor is it a criticism of Ms. Rose, who herself is extremely knowledgeable, but poses questions she knows most of her listeners are wondering about.
Given all of that, I have endeavored here to put together seven key things to know about oil and gasoline that might help the average person better understand this key element in their daily lives:
- Where does Gasoline come from? – Gasoline is one of many products derived from crude oil at oil refineries. One good way to think of crude oil is as a complex soup with all kinds of ingredients floating around in it. The refining process basically takes the crude oil soup that comes up out of the ground through oil wells and separates all those ingredients out of it. Gasoline is like the noodles in your chicken vegetable soup.
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Yesterday I appeared on BYU Radio’s “Top of Mind” program with host Julie Rose. We had a wide-ranging 20 minute discussion about gasoline prices, America’s shale revolution, the Trump sanctions on Venezuela and the ongoing influence of OPEC over crude oil prices.
Here’s the Link
And just like that, everybody stopped talking about the possibility of $30 oil.
Remember those gaudy days, all of two weeks ago, when the price for WTI had dropped to $42 per barrel and fears were rising that the OPEC+ countries had somehow lost all control over the market and prices would continue to fall? Yeah, those were some good times, huh?
Today, January 15, the WTI price has recovered to over $51/bbl, a rise of 25% in two weeks. That did not happen because of suddenly higher global demand, because no such thing has taken place; nor did it happen due to a dramatically lower U.S. rig count, since the DrillingInfo domestic rig counthas dropped by just 15 rigs since January 1; and it didn’t happen due to the much-publicized recent curtailments in Canadian crude production, which have thus far taken about 140,000 barrels of oil per day off of the market.
So, why did the price go right back up the last two weeks after tanking so dramatically towards the end of December? The answer has largely to do with recent actions taken by OPEC+ nations.
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Well, that all escalated – or rather, de-escalated – quickly, huh? During the course of a six-day vacation around Christmas, the WTI price for crude dropped from $50/bbl down to $42/bbl. That takes a situation on oil prices that was already troubling for most domestic producers into the potentially-calamitous range for companies saddled with heavy debt loads and high lifting costs.
This latest collapse in crude prices comes on the heels of a longer-term drop that lasted throughout October and November. From October 2 through November 30, WTI fell from $76.41/bbl to $50.93, a decline of about 33%, as it became obvious to traders and investors that the market had become significantly over-supplied despite the re-implementation of U.S. sanctions on Iran by the Trump Administration.
This overall 45% drop in the domestic benchmark price for crude took place during the same period when producers were setting their capital drilling budgets for 2019. While one might think that reality would cause a significant curtailment of drilling activity during the first half of 2019, consider that only about a third of that price drop had come about by November 1, by which time most of these companies were finalizing those budgets. With WTI sitting at $63/bbl at that time, few were anticipating a further drop of this magnitude by the end of December.
Here’s the thing: Thousands of domestic drilling projects that are economic to drill at $63/bbl are uneconomic to drill at $42/bbl. So right now we are already beginning to see reports that some companies are going back and reconsidering some budgeting decisions that were made just a month ago. Others are likely still in wait-and-see mode as they try to assess whether the December price drop is a temporary result of panic-selling or a more long-term phenomenon related to a weakening global economy.
Given all of this, my first prediction is that we will see a gradual fall in the domestic U.S. rig count throughout the first half of 2019.
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The Evening Campaign Update
(Because The Campaign Never Ends)
Tired of all this Winning yet? – If you’ve been irritated by how much it’s cost you lately to fill your car with gasoline, well, cheer up. President Trump is on the case.
In fact, if you believe the folks at Bloomberg, he’s already caused the Saudis to blink and start working to get up to another 800,000 barrels of oil per day onto the global market in an effort to stabilize the price for crude oil at current or slightly lower levels. Given that crude is the raw material from which gasoline is refined, a halt to the rapid rise in that commodity’s prices that has taken place in the last year will also stop the rise of the price at the pump. Crude prices dropped more than $3.00/barrel (roughly 5%) on Friday in response to the Saudi/OPEC announcement of their intention.
So, how did President Trump accomplish all of this? Optically at least, he did it with a single tweet. On April 20, the POTUS took to his famous Twitter feed to slam OPEC for the rapidly rising price of gasoline as Americans headed into the summer driving season:
As Bloomberg reports, the Trump tweet produced an immediate reaction among the various OPEC ministers:
OPEC officials were in a meeting at the opulent Ritz-Carlton hotel in Jeddah on Saudi Arabia’s Red Sea coast when Trump tweeted his views and they immediately saw it as a significant intervention.
“We were in the meeting in Jeddah, when we read the tweet,” OPEC Secretary General Mohammad Barkindo said on Friday. “I think I was prodded by his excellency Khalid Al-Falih that probably there was a need for us to respond,” he said. “We in OPEC always pride ourselves as friends of the United States.”
Given that, unlike his immediate four predecessors in office, President Trump does not hesitate to lever negotiations over seemingly unrelated matters into one another, using all of the influence of the United States to obtain positive results, these OPEC countries also have developed a new-found sense of respect – likely bordering on fear – for expressions of concern coming from the U.S., even when they come from a Presidential tweet. Perhaps even especially when they come from a Presidential tweet, come to think of it.
Now, probably there was more to this new attitude suddenly being expressed by OPEC countries. The Bloomberg story cites a recent congressional hearing covering proposed legislation that would attempt to make OPEC and other commodity cartels subject to the U.S. Sherman Anti-Trust Act, and there have likely been negotiations between U.S. and officials from Saudi Arabia and other OPEC nations taking place behind the scenes since April 20. But there is no doubt at all the President’s tweet got this ball rolling.
So, when you next go to fill up your car and notice that the price of unleaded has dropped a dime a gallon in response to Friday’s 5% drop in the price for crude oil, you know who to thank.
Isn’t it nice to have a President who’s looking out for our interests instead of the interests of some nebulous “international community?”
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Today’s news moves at a faster pace than ever. Whatfinger.com is my go-to source for keeping up with all the latest events in real time.
If you’re wondering why gas prices go up a this time of year, I explain it all with host Julie Rose on @BYUradio here.
Every year at this time, gas prices seem to go up. Or maybe it’s just that we notice it a bit more, because we’re making vacation plans? You’re not imagining things: the price for regular unleaded gas is at its highest level in three years. Americans are paying an average of $2.74 per gallon of regular unleaded right now, which is 30-cents higher than it was at the start of the year.
While many in recent years have tried to characterize the production of oil and gas from shale formations, with its repeating processes and low frequency of dry holes, as essentially a “manufacturing” process, it really is not at all similar to the making of textiles, steel and plastics.
All of which is sort of a long way around to getting to a headline that ran in Monday’s Arab News: “The Big Question for U.S. Shale: Is it Permanent or Just Permania?” Given that nothing in oil and gas is ever permanent, the obvious answer to the question is that the current situation related to U.S. oil and gas development is a great, big case of “Permania.”
The real question, as borne out by the discussions atlast week’s CERAWeek conference in Houston, is just how justified the current case of rampant “Permania” happens to be, and more importantly, how long it will last. If you ask Tim Dove, CEO at the largest Permian Basin producer, Pioneer Natural Resources, it is very justified indeed. So justified, in fact, that Dove announced just a few weeks ago that his company would be divesting 100 percent of its non-Permian Basin assets soon, and betting its entire future on maximizing the potential from its more than 700,000 acres of leasehold in the massive Permian region.
“What we’re staring at beneath our feet cannot be replicated anywhere else in the United States. That’s a given,” Dove told the IHS Markit-sponsored conference last week, “We have a golden goose right before us.”
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Energy Week, Episode 7: Covering the Oil and Gas Landscape With Allen Gilmer
David and Ryan were happy to welcome DrillingInfo Chairman Allen Gilmer to the show. The show begins with a discussion about DrillingInfo’s recent acquisitions and the services it provides to a wide variety of clients. The discussion then moved to a recently-released study from MIT which theorizes that the U.S. Energy Information Agency is over-estimating the potential for oil and gas recovery in U.S. shale plays, a thesis with which Allen strongly disagrees. Next, Ryan and David asked Allen about his views about the Eagle Ford Shale and its potential, before moving to a similar discussion about the Permian Basin. The show closes with Allen giving listeners his views on the outlook for natural gas this winter and in the coming years.
Links to Articles Referenced in this Episode:
MIT Study Suggests U.S. Vastly Overstates Oil Output Forecasts
After 2.5 Billion Barrels, Eagle Ford Has More Oil Coming
Gilmer: We Should View The Permian Basin As A Permanent Resource
Listen to the Podcast Here
Bloomberg carried a report late last week titled “Goldman Says Oil Market’s Too Jittery When There’s No Need to Be.” The report summarized a memo from Goldman Sachs analysts positing that the just-completed extension of the deal between OPEC and Russia to limit oil exports “indicates a reduced risk of both unexpected increases in supply as well as excess draws in stockpiles.”
The report didn’t address the reality that one of the main reasons why the crude markets remain jittery is very likely due to all the conflicting reporting in the energy-related news media leading up to that extension. While there was never any real, firm reason to doubt the extension would get done, pretty much every day in November was filled with speculative stories with click-bait headlines expressing doubts the parties could reach agreement.
While this is just the nature of the U.S. news media in general these days, the reality is that there has been precious little volatility in crude prices throughout the second half of 2017. In fact, on June 19, I wrote the following:
The mid-year review processes [for corporate upstream companies] I mention there are now coming to conclusions, and as a result of those reviews, we can expect the domestic rig count to level off and even perhaps decline slightly over the second half of 2017.
That’s exactly what has happened as these large independent producers scaled back their drilling budgets for the second half of this year, and it’s the main reason the frequent ups and downs in crude prices that had characterized the previous two-plus years have been replaced by what has been a steady rise in prices over the last five months. The key understanding to grasp in this equation is that, on the global stage.
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