In baking, all the ingredients and proportions must come together in harmony to have the perfect pie. The perfect pie requires not just the right amount of ingredients and temperature, but also some finesse and heart so that when you pull it from the oven, you hold perfection in your hands.
The oil and gas industry is the same. All of the pieces have to fall into place to have reasonable and sustainable prices and growth. The right amounts of production, technological know-how to increase efficiencies, good cash flow, low operating costs, smooth transportation and refining factors, and demand all must come together at the right time.
Balance in the oil and gas industry is the similar component to proportionality in baking; too much or too little of any one ingredient throws the whole recipe for successful oil and gas economics out of whack. The U.S. Energy Information Administration (“EIA”) graph of the Cushing, OK WTI Oil Spot Price is evidence of the volatility in the industry’s kitchen – click here to view.
The past week has been reflective of the past two years of oil prices – simply put, the ingredients are out of proportion.
- According to the Bloomberg article entitled, “Oil Falls to Two-Month Low as U.S. Drilling Climbs Amid Surplus,” the increase in the rig count could be partially to blame. Reportedly, “[o]il dropped to the lowest in more than two months after U.S. producers increased drilling for a fourth week even as the market contends with abundant stockpiles.” The article cites Baker Hughes, Inc.’s report of the number of active rigs increasing by 14 to 371. In addition, “while the global oversupply has faded, high inventories of both crude oil and refined fuels coupled with signs of faltering demand growth have stifled the price recovery.”
- According to Fortune.com article, “Here’s Why Some Huge Hedge Funds Think Oil Prices Could Plunge Again,” “the emerging downtrend in oil prices has emboldened managers to increase their bearish bets on short-term oil prices.” The article states, “[s]ince the start of 2015, there has been a strong correlation between hedge fund short positions and WTI prices.”
- Nasdaq.com reports, “Oil Prices Lower as Bearish Outlook Remains” and notes that “[o]il prices have been under the $50-a-barrel threshold for weeks thanks to multiple bearish factors.”
This weekend, I set out to bake the perfect cherry pie. Baking a pie in July, even in air-conditioning, is not for the faint of heart. The crust is the foundation a pie is built on – it not only holds the pie together but its flaky texture must juxtapose with the fruit. If your crust gets too warm, the butter in it will melt and the whole foundation of your pie is weak.
As I juggled to fill my pie crust with my hand-pitted cherries before it became too warm, I realized that the economics of the oil and gas industry are much like this balancing act – until the ingredients come together in balance in the oil and gas industry, oil prices are not going to be very appetizing.