$50 Oil - again - will it stick this time?

Back on May 27, I first wrote about WTI hitting $50 and that was exciting until pricing went back into the low $40s after the Alberta fire died out and the Niger Delta Avengers stopped blowing infrastructure up. So our brief fling with $50 oil was fleeting as it was caused by temporary supply disruptions. What is different now that WTI has settled above $50 again in early October?

Take note - OPEC and Russia have been producing at record capacity

Oil pricing rose again on comments from Saudi Arabia that they are willing to concede to Iran's demands and letting Nigeria and Libya recover to prior production levels if (and this is a big if) their internal military conflicts are resolved. So this is the Saudi's first public acknowledgement that they are willing to take collective action in capping supply (at which they've been producing at near records) with the goal of gradually raising oil prices. Not to be left out of the action, the Russians have also been producing oil at record volumes, so that if caps do come, they can easily accept a cap or a slight roll back in production volume without compromising their market share.

The big run up in production is now over - the Saudis tossed in the towel

So the Saudis finally blinked. They started a price war that they didn't know how to stop. The impact on their economy and their social order was beginning to take too large a toll. It was a risk that the government was increasingly less confident that they could handle. They kept flooding the market with cheap oil, which further forced shale producers to innovate or exit the market. And then the Russians started playing the same game. We'll their plan didn't work and it is now time for Plan B.

If I were Saudi Arabia how should Plan B play out?

The answer is slowly. I do not see dramatic or quick changes occurring with producer behavior so any production caps, if they occur, will have minimal impact on market pricing as the supply overhang slowly gets addressed. What I do see however is a market settling around $50 (WTI) as the Saudis have signaled that they want to put a floor on pricing. For the Saudis, $50 oil is a lot more palatable to the budget then $40 oil. If the Saudis open up the barn door too wide....shale oil starts running through the door and that is the last thing the Saudis want to see. While the low oil prices have effectively killed high capex projects they haven't killed off shale and new shale basins such as in Mexico and Argentina are waiting in the wings to join the party once market pricing recovers to a sufficient level. So don't expect to see any dramatic announcements or quick changes as the Saudis are only seeking to stabilize the market - so they can retain their hard fought for market share. The recovery will still be a slow climb through most of 2017 but most importantly the market is stabilizing and companies will be able to make investment decisions based on predictable pricing levels. Stability leads to predictability, which then leads to renewed investment and eventually hiring.

____________________________________________________________________

Peter Armstrong is an organic growth Business Development Executive with experience in the up/mid/down stream oil & gas industry as well as power generation, renewables and energy technologies. His expertise is identifying growth drivers whether it be internal sales force optimization, qualifying new markets, revitalizing legacy brands, driving product / service innovation and leading companies through digital transformation by boosting lead generation via digital marketing and web based strategies. Peter can be reached at [email protected] or 832.494.7502.