CNBC And The Citigroup Report
I was in a meeting in New York Monday when the emails and calls started blowing up around lunchtime. Citigroup released a report lowering its forecast for oil to as low as $20 per barrel, stating the known facts that while rigs continue to go down, supply continues to go up. Storage tanks are indeed brimming and tanker day rates are shooting up as producers look to floating storage for the immediate future.
And granted, Brazil and Russia are pumping at record levels. It seems the whole world is unaware that if there would be roughly a 2-percent worldwide cut in production (roughly 2 million barrels) that prices could likely rocket up ten, fifteen or even twenty percent, or more? Are these people ignorant, or just badly lacking in math?
One of those emails Monday was from CNBC, asking if I could run down to the NYSE to appear on Closing Bell with Kelly Evans and their 2nd hour panel. With the ink barely dry on the Citi report, they were ready to pounce on any idea that oil prices could sustain higher levels.
What I told them is what I’ve reiterated here. I don’t see the fundamentals in place for prices to remain this low for an extended period. Last spring, when crude was frolicking above $100 and optimism reigned supreme, we at Breitling Energy started looking at models that showed unsustainability, mostly due to swelling supplies and initial demand softening. Our models proved right. We remained conservative, focusing on the Permian Basin, and established an Asset Management Division to diversify risk. Hindsight says the plan worked well for a relatively small E&P, but we sure didn’t know it when prices seemed to be scaling the wall unabated.
What I told Kelly and the CNBC audience is that I just don’t see the fundamentals in place for oil to drop more precipitously and stay there for an extended period. Could they bounce around here for a while? Certainly. In fact, likely. And could we break $40? I learned a long time ago not to try to forecast precise oil prices. I focus more on trends and fundamentals.
What I do see, however, are probable shorts talking about lower prices for an extended time. Markets can indeed respond to jawboning.
Supply is increasing. Granted, we had a heck of a boom going. It’s going to end up taking about a year – from last fall to perhaps sometime this summer or early fall – to wind it down. It was indeed one HELL of a boom. To that end, there may be still more EIA reports of increasing supply.
Go back to fundamentals. Rigs are down 177 the first 2 weeks of February alone; that’s a lot of supply not being added to the market. Decline curves on shale wells are steep. With less investment in new projects, existing supply eventually starts to fall.
When? I have no idea. It was a HELL of a boom.
Demand in the U.S. is going up. In December, 2014, the F-150 was the most popular selling vehicle in America. Ford-tough. With gas prices below $2.50, consumers started rushing to snatch up new vehicles last fall. And notice that wasn’t new ‘cars’. They were buying SUV’s. Gas-guzzling SUVs. Eventually, this will be reflected in government demand numbers.
Meanwhile, looming uncertainties remain ever-present in places like Venezuela and Libya. ISIS recently moved on Kirkuk, rattling the markets. The Iranian sanctions could be lifted or revised this year, and we don’t know what that will look like supply-wise. But if they are relaxed, allies like Saudi Arabia and Israel will be plenty “ticked”.
Finally, a friend of mine spoke to Harold Hamm at a recent conference in North Dakota. Hamm said privately what he’s been saying publicly – that we just have to get through summer. Hamm is bullish on prices the second half of 2015.
All things considered, prices appear to be basing, even amidst speculation this is nothing more than a dead cat bounce. I would disagree. If you measure the fundamentals on Libra’s scale, it appears to me the balance would tip to higher prices at some point later this year.
About Chris Faulkner: Chris Faulkner is CEO of Breitling Energy Corporation (https://www.breitlingenergy.com/), author of “The Fracking Truth: America’s Energy Revolution” and producer of the documentary “Breaking Free: The Shale Rock Revolution”. Chris makes regular appearances on CNN, Fox Business and CNBC.