Revisiting the Second Black Swan

It has been almost five months since West Texas Intermediate (WTI) Crude Oil Prices slid into the negatives due to a price conflict between Russia and Saudi Arabia. In fact, Prices ended April at just $18.40 per barrel, the lowest in just over 18 years. Despite upward momentum in recent months (Prices finished August at $42.61), Prices are down 25.5% year over year. However, positive developments that occurred throughout the last quarter suggest better days (i.e. higher Prices) ahead.

The Good:

1. The WTI Oil Prices 3/12 rate-of-change reached a tentative low in May and rose for the last three consecutive months. This is a positive ITR Checking Point™.
2. US Vehicle Miles Traveled rose in June after declining in April, suggesting an increase in demand for fuel.
3. Our forecast for US Industrial Production calls for year-over-year growth in 2021. This, along with forecasted rise in CAPEX investment, will support increased demand for oil throughout that time.

Although the above factors indicate that some downside pressure on oil and gas is easing, we aren’t out of the woods yet. The Federal Reserve Bank of Dallas's Energy Survey for Business Activity shows a pessimistic outlook in the near term. The survey asks, “In the current quarter vs. the prior quarter: has your firm’s level of business activity increased, not changed, or decreased?” The September edition of the survey came in with a reading of -66.1. A reading below 0 signals contraction, and this latest reading is lower than the previous low of -42.1 (set during the first quarter of 2016).

The Dallas Federal Reserve also asked in its survey, “In the top two areas in which your firm is active: what WTI oil prices does your firm need to profitably drill a new well?” Answers varied with the location of drilling, but responses included:

• $46 per barrel for the Permian (Midland)
• $46 per barrel for the Eagle Ford
• $51 per barrel for the Bakken

Therefore, with Oil Prices trending in the high $30s at the time of this writing, it is unlikely that we will see significant investment in drilling new wells until Prices are higher.

While it is likely that profitability woes in the industry will continue to characterize 2020, many firms expect increased demand for oil in 2021. Increased demand would lead to higher Prices, all else being equal. Expect 2021 to afford greater opportunity in the industry. Now is the time to evaluate your capacity and identify and eliminate process-flow redundancies and bottlenecks in preparation for next year's increased demand.

Taylor St. Germain

Analyst and Speaker