First oil

As we enter yet another New Year, this editor looks for signs of optimism to latch onto, in hopes that the upstream industry’s fortunes will be better in 2019. Perhaps the most encouraging factors continue to be the technical brilliance and innovation demonstrated by this industry, and the perseverance shown by its companies in the face of a host of negative economic, political, social and media factors.

And yet, two groups have a disproportional effect on this industry’s fortunes—the U.S. national media and oil traders. Furthermore, neither group is ever required to be held accountable. Given recent behavior, one might ask, “who is more despicable, the U.S. national media or oil traders?” 

Persistent media negativity. The leftist malcontents in the U.S. have excoriated President Donald Trump, every time that he has labeled the national media as “the enemy of the people.” And yet, there is some truth to the allegation. Many accomplished people in the U.S., from the business world and elsewhere, would make fine public officials. Yet, the vast majority refuse to put themselves, and their families, through the media meat grinder to run for political office. Hence, we are left with only the true political junkies running for office, who also happen to be at the extremes of their political parties. From this process has ensued the vast political gulf that we have today. Thus, the media are partially responsible for the screwed-up political environment in Washington, D.C. 

So, it is always refreshing to see someone enter office, who has survived the media meat grinder and wants to do a good job. Such was the case in early 2017, when now-former Interior Secretary Ryan Zinke entered Trump’s cabinet as a former Navy SEAL, Montana legislator and U.S. congressman. True to his word, Zinke did more to help the industry over the last nearly two years than any other federal official. He opened up federal lands and offshore tracts to upstream development, eased restrictions on drilling practices, and rolled back the more punitive environmental regulations. 

Not surprisingly, the environmental crowd, with help from leftist lawmakers and the media, decided to drive Zinke from office. They built a collection of relatively minor ethics problems that caused him to have to retain expensive legal counsel. In early December, Zinke told a group of oil and gas executives that it was easier to be a Navy SEAL than a Cabinet secretary. “I always say, ‘Actually, SEAL was easier. As a SEAL, people shot at you, I could shoot back.’” A week later, Trump announced that the secretary would leave office on Jan. 2. 

Oil trader behavior. When it comes to oil traders, the record is clear—they make money on movement, either up or down, and they can use the flimsiest of geopolitical excuses or “feelings” to justify a sudden shift in any direction. Like the media, oil traders are not accountable to anyone in particular. Yet, their actions can be damaging and disruptive. 

Mere “suspicions” or “feelings” that a surplus of oil supply might be building is not enough to justify shoving prices down $13/bbl, but that’s what traders did between Oct. 22 and Nov. 14, when IEA released its monthly Oil Market Report. And when IEA’s report said that there was an implied stock build of 2.0 MMbopd, the traders did not wait for OPEC and Russia to reach a 1.2-MMbopd output cut on Dec. 7. They immediately sent the price tumbling another $5. Even after the OPEC/Russia deal, traders scoffed at the group’s seriousness about cuts, pushing prices down to $42.53 on Dec. 24. Since Jan. 1, we now know that OPEC is quite serious about making cuts, and the price is recovering, but the damage is already done. 

What could have been a year of solid gains in the upstream sector is now in doubt, given that lower oil prices occurred while operators were setting capital budgets for 2019. But maybe we’ll be pleasantly surprised, and the supply-and-demand geeks will get it wrong again. It’s a bright spot worth hoping for. 

About the Authors

Kurt Abraham

World Oil

Kurt Abraham kurt.abraham@worldoil.com