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Consolidation Is Key

This week, two major U.S. shale acquisitions were officially announced when ConocoPhillips announced their acquisition of Concho Resources and Pioneer Natural Resources announced their agreement to acquire Parsley Energy. The Pioneer all-stock transaction valued at $4.5 Billion (inclusive of Parsley’s debt increases the value to $7.6 Billion) is significantly less than the all-stock transaction of the ConocoPhillips deal valued at $9.7 Billion (inclusive of Concho’s debt increases the value to $13.3 Billion) but is significant nonetheless. Major moves in the U.S. oil and gas sector indicate that consolidation is the future.

Nationalizing the United States Oil Industry

Falling oil prices and a surge in green energy policies have breathed new life into an old idea: to nationalize the fossil fuel industry. The problem is, nationalizing oil and gas would be a radical step, and alone it would not be enough to deliver a comprehensive energy transition that can meet climate goals as well as the social objectives of the Green New Deal. While calls have been made to nationalize oil and gas development in the U.S., the inefficiency of government oversight cannot do a better job than private enterprise at developing and managing these natural resources.

Heating Up

A wild week in oil news saw some of the world’s top analytics firms’ predictions on the future of the oil and gas industry in the United States be overshadowed by the possibility of a massive merger between two shale powerhouses and approval of an expansion for the Dakota Access Pipeline. As temperatures begin to cool off into the winter season, election season is causing the oil industry to heat up.

Brent-WTI Crude Price Spread: An Ever-Changing Dynamic In Commodity Futures

The price spread between the world’s most traded crude oil blends and the most actively traded commodities in the world generally track one another, but divergences often reflect technical, supply/demand, or geopolitical issues. Over the course of history, the spread between Brent crude and WTI blends has grown, shrunk, crossed paths, and reversed again countless times. As a result of reduced U.S. pipeline constraints, ongoing OPEC+ production cuts, and China purchasing record amounts of WTI crude oil, the spread between Brent and WTI crude oil prices has begun to shrink close to zero. The future may hold a reversal giving WTI prices the upper hand.

Battle Of The Bigs

Chevron Corporation overtook Exxon Mobil Corporation as the largest oil company in America by market value, the first time the Texas-based giant has been dethroned since it began as Standard Oil more than a century ago. But neither are any match for a Hurricane as both majors have evacuated production platforms in the Gulf of Mexico ahead of Hurricane Delta. The Bureau of Safety and Environmental Enforcement estimated about 80% of the Gulf’s oil production and 49% of natural gas production has been shut-in, including over 180 production platforms. Hurricane season has chronically caused trouble in the gulf region and a historic 2020 is no different.

The Intrinsic Value of Crude: An Underestimated Commodity

Crude oil prices are ridiculously cheap when compared to the cost of other commodities and equities. For the industry to survive and provide the world with its most important commodity, the price of crude oil must increase dramatically in the near future to break out of the lower tercile historical range it has been caught in since the start of 2020. Another two years of “lower for longer” can only exist if other asset bases devalue themselves to close the gap between crude. A more likely scenario is the positive feedback loop of reduced investment and tightening supply will cause a violent movement upwards for the intrinsic value of oil.

You Can’t Change The Past

On Thursday, news headlines read “Oil Prices Slide As OPEC Opens The Valves” which referenced the overall increase in OPEC production for the month of September. Yet only 3 of the past 14 weeks has the EIA reported domestic crude oil inventory builds. In the month of September alone, there was a total of 10.989 million barrels of crude oil drained from domestic inventories and yet when news breaks that OPEC increased production during September, when global inventories fell at historic rates, current prices dropped. Seriously?!? Market participants are reacting to something that happened in the past without paying attention to the actual supply/demand picture.

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