Oil and Gas Price War Looms; Trump to Worsen It

Making America Great Again, by returning to a past that never existed at all (source).

by Gaius Publius

In a previous piece, "Climate Change in the Age of Trump: A Profit-First Energy Plan," we looked at the Trump "energy" plan and found it to be instead a profit plan for the oil-and-gas industry. The reason: It's not really about delivering energy to the country — as you'll see in a moment, it's likely to do the opposite. The Trump energy plan is just about making one last attempt to prop up a single powerful, energy-sector industry at the expense of all the others.

From that plan (my emphasis):

Sound energy policy begins with the recognition that we have vast untapped domestic energy reserves right here in America. The Trump Administration will embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans. We must take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own. We will use the revenues from energy production to rebuild our roads, schools, bridges and public infrastructure. Less expensive energy will be a big boost to American agriculture, as well.

The Trump Administration is also committed to clean coal technology, and to reviving America’s coal industry, which has been hurting for too long.

The attempt will fail, on both counts. It will fail to deliver energy, and it will fail to deliver profit, and for the same reason in both cases. The problem is, the price of fossil fuel, oil and natural gas (methane), is at a company-killing low, and the market for both is glutted with supply in a world of shrinking demand.

These are twin killers. As demand for a product falls, the price for that product falls with it, all other things being equal. Add the problem of rapidly increasing supply at the same time and the price falls precipitously, in some cases below the cost of production. And prices are clearly currently at dangerous (for the industry) lows.

Inflation-adjusted price of West Texas Intermediate crude oil, January 2000 through January 2016 (source)

Traditional drilling can extract oil that still makes a profit at current prices, but hard-to-get-at oil and gas — tar sands oil, fracked oil and gas —are just not profitable now. Which means that companies relying on those technologies are at risk of going under, depending on whether they have deep pockets financially versus whether they are over-leveraged and too deeply indebted. (This danger applies to the banks, hedge funds and venture capital funds that hold their debt as well. Not only is the oil-and-gas industry threatened; its financial backers are also under siege by the same forces.)

What Trump has said he will do — in this low-price, profit-threatened environment — is flood the market further with supply. Two recent pieces have pointed out the dangers of that attempt.

From the Wall Street Journal, a discussion of the problem faced by fracked-gas producers (subscription required; my emphasis):

Gas Glut Reverses Lucrative 2016 Trade
Natural-gas futures have fallen 25% in the oversupplied market, hurting plans to grow U.S. exports

A flood of natural gas swamping the U.S. is turning into a global glut, sinking prices and dimming the hopes of American producers to export their way out of an oversupplied domestic market.

Natural-gas futures have fallen 25% over the past 2½ months. The declines continued Tuesday, with April futures dropping 3.45% to $2.938 a million British thermal units on the New York Mercantile Exchange. Shares of gas-production companies are among this year’s worst performers.

“Investors right now across the board just hate natural gas,” said Pearce Hammond, an analyst at Simmons & Co. International in Houston.

The recent declines reverse one of last year’s most profitable trades: Gas futures rose 59% in 2016, and shares of producers including Chesapeake Energy Corp. and Rice Energy Inc. doubled between March’s lows and year-end.

Many investors wagered that new gas-fired power plants and record exports would help burn off much of the excess supply in the U.S. But a historic level of exports hasn't been enough to transform a market dominated by unpredictable weather and massive new supplies from fracking.

Note that the Journal wants fossil fuel exports to grow — a climate-killing proposition, but what do they care, so long as profits are protected. Their complaint is that profits are threatened.

OPEC has attempted to head off this profit crunch by attempting once more to agree to limit supply (and thus sales). This attempt, modest to begin with, has failed, as these attempts often do.

From Nick Cunningham at OilPrice, via Naked Capitalism:

New Oil Price War Looms As The OPEC Deal Falls Short

...So, we have OPEC talking up a major production cut deal, and also trumpeting its unprecedented rate of compliance. Oil investors listened, and became incredibly bullish on oil prices, expecting a sharp tightening in the market to be forthcoming. But while the participating countries have indeed taken about 1.1 mb/d [million barrels per day] off the market, they did so from their peak levels, and those cuts were offset by rising output from Libya and Nigeria.

To be sure, Libya’s output is once again under threat of violence near the country’s largest export terminals – Libya has already lost about 80,000 bpd [barrels per day] in recent weeks. And recognizing Nigeria’s threat to the integrity of the OPEC deal, OPEC officials have suggested that Nigeria could lose its exemption status if the cartel extends the deal for another six months.

Nevertheless, about midway through OPEC’s six-month deal, the headlines about success are belied by a much more measured impact on supply fundamentals. The bottom line is that OPEC has only taken a few hundred thousand barrels per day off the market from last summer’s levels.

And those barrels from the Middle East are quickly being replaced by barrels from Texas. U.S. oil production is closing in on 9.1 mb/d, up about 600,000 bpd from last summer. After largely ignoring this growing threat, hedge funds and other money managers have suddenly grown more concerned as bloated inventories continue to rise, and a liquidation of net-long bets could be underway. Bullish bets are now at a one-month low and could be heading down. That helped spark a sharp correction in oil prices last week, down about 9 percent in a few days.

In short, the OPEC deal was kind of weak to begin with, and now U.S. shale could be killing off the OPEC-fueled oil price rally.

The bottom line is this. Trump's energy plan is proving to be what I said it would be when it was announced, an industry-killing plan disguised as its salvation, and a plan that will take us down with the industry it seeks to protect:

This [energy plan] will roil the oil market, which is already glutted with supply at unsustainably low prices. Look for energy market crises — and business bankruptcies — to increase, perhaps exponentially. Many smaller fracked-oil companies will go bankrupt, and the banks that financed them may need another bailout.

As the Journal pointed out, "Bernstein Research, Macquarie Group Ltd. and energy investment bank Tudor, Pickering, Holt & Co. all are warning that oversupply may weigh on the market for years."

So, chaotic energy market with a side of bailout. Fair warning — not only has the weather turned permanently tumultuous, but markets connected with the weather, particularly oil and gas, have turned turbulent as well, perhaps permanently so.

With maybe worse to come. First, look for this turbulence to continue until the day we're no longer carbon-dependent, a day that almost no one in power is working to see dawn. And second, look for the tumult to geometrically worsen, as Trump and his team implement a solution that looks for all the world, even to the players involved, like fuel to enflame the problem.

It's going to be a fascinating ride. By attempting to force a return to Happy Motoring, the oil-and-gas industry has insured the opposite, a ride to energy hell, both for them and for us. Is it an emergency yet? Time, perhaps, to act?

GP