Oil: The New World

Written by: Global Thought Leadership | March 15, 2019

Source: Bloomberg, as of 3/14/2019. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

THE BOTTOM LINE

  • The balance of power in the oil and gas markets has changed dramatically since OPEC was founded in 1960.
  • Booming shale oil production has propelled the U.S., a non-member, into a leading role whose influence over global supply and price is arguably comparable to Saudi Arabia itself. Indeed, the U.S. actually out-produced the kingdom for several months in 2018.
  • Smaller U.S. exploration and production (E&P) companies have been responsible for much of the leap, but as a group, their profitability – and their balance sheets – are highly leveraged to the price of crude. Many were driven out of business as the price plummeted from $110/barrell (bbl) in June 2014 to as low as $26.21 less than two years later, largely as a result of OPEC flooding the market, as legendary oil man T. Boone Pickens put it, "…to teach those shale boys a lesson".
  • But shale producers adapted, survived and thrived, transforming the global marketplace from dependence on exploration to demand-driven production – and making prices more stable – at least so far.
  • As a result of that relative price stability, exploration and production companies have been able to stabilize their capital investments, which were mostly spent on exploration, shifting to more predictable expenditures on building production capacity. That, in turn, allows them to provide more stable return of profits arising from higher oil prices directly to investors in the form of dividends or partnership income – a radical change from the boom-or-bust nature of these businesses.
  • All of which gives most participants in the global oil market a vested interest in stable prices at a profitable level, which may help to explain the relative calm rise in crude prices since the beginning of 2019.
  • As seen in the chart, prices rose unsteadily in the beginning of 2018, falling as the U.S. embargo on Iranian oil cut in in Q4.  But since OPEC and Russia began to cooperate in enforcing OPEC's price support via volume reduction, prices have both risen to more mutually profitable levels and become less volatile.

 


All data Source: Bloomberg as of March 14, 2019, unless otherwise indicated.

 

Definitions:

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.

Brent Crude Oil is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.

 

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