Even in the midst of some of the gloomiest talk the Permian Basin has heard in recent years, there still exists a flicker of optimism. Despite the price crash of April 2020, which followed the price crash of March 2020, industry observers nonetheless catch glimpses and glimmers of better days ahead.
We share this report as the first in a series of three that traces this thread of hope within the industry, and especially within the oilfield services (OFS) industry, and especially within the Texas-New Mexico region, where Integrity Wireline LLC is most active.
Let’s begin with opinion from Bloomberg News, from an article they published in late April.
“Oil extended its recovery from Monday’s (April 20) plunge below zero, but trading remains volatile with the market under intense pressure from a swelling global glut.”
Okay—that’s not so uplifting. But any assessment of the market has to begin with an acknowledgement that we are dealing with an oil glut of massive proportions. Once that’s accepted, it becomes a question of how, if, and when that oil glut might be reduced.
For that, we turn to a recent article in Oil and Gas Journal, where we find this remark:
“If production does fall sharply, some oil goes into strategic stocks, and demand begins to recover, the second half of 2020 will see demand exceed supply. This will enable the market to start reducing the massive stock overhang that is building up in the first half of the year. Indeed, our current demand and supply estimates imply a stock draw of 4.7 mb/d in the second half.
“There is clearly a long way to go before we can put the Covid-19 crisis behind us. However, we are encouraged by the solidarity shown by policy makers from producing and consuming countries working together to meet this historic challenge of bringing stability to the oil market.”
Analysts have noted that there could come another sizable dip before crude prices get onto a sustained upward trajectory, if indeed they are headed that way in the first half of 2020. The reason for the (anticipated) dip? Hedging contracts for many oil companies are set to expire in May and June. That alone will exert a downward pressure on crude prices. But there is also the likelihood that oil companies, in seeking renewals of their hedges, won’t be able to obtain terms so favorable as they had before.
Crude Oil Price Volatility
Any discussion of crude oil’s fortunes must take into account this commodity’s price volatility. A report from the Energy Information Agency shared a chart that illustrates price fluctuations. Notice the extreme spike on the far right side of the graph.
Here’s is EIA’s own breakdown of their graphic:
“Since 1999, daily WTI crude oil futures prices have settled within 2 percent of the previous trading day’s price about 70 percent of the time. Nearly all [99.5 percent] of the daily WTI price changes since 1999 have settled within 10 percent of the previous day’s price; larger price changes are relatively rare. March 2020 has had four days where WTI prices decreased by more than 10 percent and two days where WTI prices increased by more than 10 percent.
“The 25 percent decline on March 9 and the 24 percent decline on March 18 were the two largest percentage declines in the WTI futures price since at least 1999. On the days following those declines, WTI prices rose by 10 percent [March 10] and 24 percent [March 19], likely in response to announced plans from various countries’ governments that emergency fiscal and monetary policy would be forthcoming.”
Crude Oil is a Commodity
But overarching all of this talk is the plain fact that oil and gas are commodities. As such, their prices are not set by producers themselves. That means that a different dynamic exists for oil producers as opposed to, say, makers of cars or makers of light bulbs.
Car makers can build their cars and set their own prices, and if the public doesn’t flock to their offerings, those same makers can trim their prices a modest amount (and likely get sales). Or if the car maker thinks that economic conditions, and not the attractiveness of their car deals, are the operative factor, then the car maker can just sit out the lull and hold their cars in inventory and hope that a few weeks or months will make a difference. In either case, though, it is the car maker who sets the price.
Not so with commodities like crude oil. They must answer to a commodities price that is set by global conditions, and that is independent of the oil producer’s own choices or actions. That price can swing wildly and the oil and gas producer must live by it and die by it. There’s little flexibility to hold back one’s inventory. All, or almost all, must be fed into the system and one must accept the results, whatever they may be.
The only recourse that oil and gas producers have is to decline to invest deeper, or commit heavier, into more production. That’s a far different thing that simply tweaking one’s product price, as a maker of light bulbs can do, and it is a different thing than holding onto one’s price and one’s inventory until buyers warm back up to one’s offerings.
But when oil and gas producers stifle their own production, costly as that is, it does have an effect, albeit an effect that takes numerous months or even a year or more to pan out. But in curtailing supply, oil producers do exert an influence on price. Indirectly. A squeeze on supply generally results in a spike in prices. Low supply equals higher demand, and higher demand equals higher prices.
So that is where crude oil’s salvation lies. And that is the revenge that commodities markets always get, eventually. They get battered by price dips that they cannot control. But in taking their lumps and curtailing their expenditures and efforts, they plant the seeds that will later sprout as their comeuppance.
It seems that the harder that commodities get hit, the harder they rebound when, eventually, they rebound, as they always do. And we can invest some hope in that prospect. The deeper the valley we must endure, the higher the peak that we should top.