Keep the Volume Down
Typically, this is a rant to my son as he hammers away on his drum kit. But it is a sentiment echoed throughout the US oil industry to global producers who have so far at least, no intention to keep the volume down – of oil production, of course.
It’s the basic rule of economics. If it costs you $50 to make, but you can only sell it for $30, you aren’t going to be in business too long. The numbers may not be accurate, but this is what America’s oilmen are dealing with as oil prices hover around their lowest levels for a decade because larger global producers refuse to keep the volume down. This allows them to set prices through increases and decreases in oil production volumes, which profoundly impacts nations with higher oil production costs. More than 70 American producers face difficulties, but they are not alone, Europe also has billions of dollars at risk in the sector (It is estimated that the US has over $120bn at risk and Europe nearly double that).
Saudi oil minister Ali al-Naimi said America’s oilmen at a meeting in Houston this week to “lower costs, borrow cash or liquidate. It sounds harsh, and unfortunately, it is, but it is the most efficient way to rebalance markets”.
With the banks heavily exposed and production costs already drastically cut, there may be minimal options left than to close up shop.
But today is a new day, the banks which are carrying a good deal of this exposure can stop and mop their brows after confirmation of a meeting next month between Saudi Arabia, Russia, Qatar, and Venezuela oil ministers to stabilize the market and hopefully keep the volume down, speculation of production cuts caused a rally in early trading.
It will be interesting to see, with a global economy still sluggish, how far any production cuts will drive prices and whether it will happen soon enough to stave off a wave of closures throughout the US oil industry. What we do know is that the low price party won’t last forever, and today’s rally may indeed herald the start of a steady climb back to oil in the $70-$80 range.
But what do all these oil price movements mean for Natural Gas prices?
At the moment, we can’t get enough of this more efficient, cleaner-burning fuel. The US has switched thousands of megawatts of coal-fired generation off in favor of gas and is even increasing its ability to liquefy gas for export. The effect over the next ten years will be significant, taking the surplus away from, by then a more gas-dependent market. For those who doubt this will happen, currently, Europe depends on a third of its gas from Russia. The predictions are that within ten years. The US will be providing almost the same at a lower cost (European gas prices are nearly three times those in the US), making us a global natural gas power.
If you vested in a natural gas-consuming plant, equipment, or generation – now is the time to get the building blocks in place to protect those investments and your return on them.
Vervantis has developed a process that helps you manage your future requirements without the need to fix everything today. Our flexible sourcing allows you to make decisions more intuitively, with less risk and better fiscal planning, creating a procurement process worth banging your drum about.