I know we’re in a bit of correction mode this morning, but we’re still a lot closer to $50 than we are $40. In the past three days we’ve managed to get back to where we belong, but it’s a bunch of little things that turned it around. Sort of like the demise of Hillary’s presidential campaign. Call it coincidence, but it all came together at once. We saw ridiculous GDP growth in the United States, Canada had pipeline and production issues, the EIA revised real U.S. production lower and OPEC jumped in late yesterday and jawboned the market right up to the $50 mark.
Oh, and we shouldn’t discount the ever-loving HFT funds that had to be having a field day with the volatility. Some will call it coincidence—I think the teeming millions know me by now, and there is just no such thing.
I’ll start with the OPEC talk and I will tell you that it’s directly connected to the EIA stats. All of a sudden OPEC is figuring out that this is no China economic data. We’ve made a list and we’ve checked it twice. The reality is that the United States is still producing 8.9mm b/d of crude oil in the Lower 48 and that’s all good with WTI benchmarked close to $40 the past few weeks. There have not been any major collapses of oil producers and the myth of oil production needing $50 or more to break even is as much a fact as Miley Cyrus is a fashion leader.
As I’ve mentioned, fracking in the United States is finding more ways to make it more economical and ECOR (enhanced oil recovery) is improving every day. This is where money is headed because this is where oil is being used the most. Just this past week we saw investment on a North Sea project fall to nearly nothing. This oil’s “new normal." The future lies in non-conventional oil investment and OPEC is now getting hit on both sides: lower oil price and lack of interest for money to build new conventional production.
The big problem for OPEC going forward is that they have to convince everyone that they are really serious here. They flipped everyone off back in November last year with bravado and said we can survive with oil at $10. Yeah, that didn’t work out so well. Now they are trying to tell those same people that we have to get together, sing Kumbaya and pull production back before the world regrets Brent under $50. The timing was right for OPEC to push the trend higher. They know that China isn’t going to improve overnight and that the United States is ready for our seasonal push lower into maintenance season.
If we were going to take this hit in the next few weeks, it’s going to be a lot easier to start from $50 than it is from $40. OPEC is clearly aware that technology is helping the U.S. producers to bring more oil out without a lot more investment. Our drilling costs are getting slashed as we are taking advantage of mobile rigs and lower costs from vendors readjusting.
There’s been no M&A manna because nobody knows oil better than the people in oil. Now funds are figuring out if you can’t buy them, it’s best to fund them. And of course, the United States has been getting more comfortable with sending our oil out into the fray and seeing what we can get back. Everything has changed and the top is now the bottom.