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Really. What is going on is strange, and it is not likely that anyone really predicted what we are seeing right now. Are current conditions what the OPEC nations expected when they lowered the price of crude, but did not cut production? Consider the following:
- The number of operating oil rigs in the U.S. has declined every week for 25 straight weeks through the week ending 22 May.
- The total number of operational rigs is now half of the number that were operating when OPEC made its big move on 27 November 2014.
- Weekly U.S. field production of crude oil surpassed 9.56 million barrels per day the highest it has been in three decades.
- U.S. crude oil production broke the 30-year-old record in November 2014, the same month that OPEC last met.
What’s Up?
The apparent disparity between the number of operation rigs and the amount of crude produced may not be as irrational as it may sound.
The decline in the number of rigs is largely in sync with the price of crude remaining in the $50 to $60 range. There has been neither a radical up or down swing that many had predicted. However, with prices still in that range, some operators’ profit margins are being squeezed.
Companies simply don’t produce and product of any kind when it costs them more to produce it than others are willing to pay for it. If they do decide to continue operating they either have a very large cash reserve that enables them to weather the storm, or the CEO’s middle name is “Stupid” and they have a death wish.
The increase in horizontal drilling an fracking production has contributed to production increases. Although those operations, too, are subject to the same type of economic constraints, it appears that they are able, at least thus far, to operate within a tighter range of margins.
Finally, “capital markets have remained open to U.S. exploration and production companies.” U.S.-based oil companies have been able to raise more debt funding in the past seven months than when oil was more than 50% higher than its current price. In addition, these companies have had more successful equity funding than they have enjoyed for 20 years or more.
Next Up: OPEC Meets on 05 June
Investors who are looking for more promising indications of profits to be made in oil are now looking toward this Friday when OPEC meets again. So far as this writer has seen, there are no indications that OPEC is about to make any policy changes that will affect either their production or any other factor that would result in a major change in the price of crude in either direction.
As usual, oil remains volatile. But, as I have said before, there is something going on that more than meets the oil eye. I believe the hidden strategy to be more long term than short and more about financial underpinnings than about oil itself.
Then again, what do I know? I’m just a man. I’ll need to ask my wife. Or maybe I will just wait to see what happens after OPEC meets.
