Analysts Warn Oil Prices Will Stop Falling Because US Drillers Can’t Meet Demand

Analysts do not expect the current slump in oil prices to last much longer despite U.S. crude sinking on Thursday. During the five sessions on that day crude futures dropped in price from $72 to $67 per barrel. International benchmark Brent crude also tumbled $6 per barrel from it’s high of $80.50. However, it has since picked itself back up to $78 a barrel.
Speaking to CNBC, Tamar Essner, the director of energy and utilities at Nasdaq explained that he believes the drop is temporary. He said that the fundamental picture is still strong but the market is a bit dislocated right now.
Indeed, the market is notably risk averse at the moment. This appears to have been stoked by fears that Trump is in the process of starting trade wars as well as by concerns over the integrity of the European Union. These factors have caused the U.S. dollar to strengthen, which in turn makes commodities sold in dollars more expensive to holders of other currencies.
Oil prices were already lowering in the wake of the news that OPEC, Russia and a number of other oil producing nations may wind down their pact to cap production. This pledge has been in place for 17 months now and has been consistently undermined by U.S. shale. Nevertheless, the agreement got rid of a global glut of oil and restabilised the market. However, due to the recent unrest in Venezuela and renewed sanctions by the U.S. against Iran, the policy is now coming under review.
Venezuela’s oil output has dropped a staggering 500,000 barrels a day this year so far. It is also likely that this number will grow or even double by the end of the year. Meanwhile, U.S. drillers are unlikely to be able to ramp up production by 1.2 million barrels a day. Therefore, it is unlikely that the price of oil will continue to plunge in the way it has done recently.
Further to this, the number of American drillers trained in the art of freeing crude oil from shale rock formations is dwindling. The pipeline capacity in Western Texas is also limited. Combined with these factors is the fact that drillers are more invested in providing returns for investors than plowing capital into new production.
Clearly, upping output will be a challenge and on top of all that many drillers have already promised to deliver oil to customers at a price far below where oil sits in the market today.
"They're sort of locked in, and when you look at the slope of the futures curve, it's going downward. That makes it harder to hedge production at attractive prices for further-out years," Essner said.
It is also predicted that were oil prices set to drop below $70 a barrel, OPEC would intervene. While anything below $70 would be too low, anything above $80 would be too high. Therefore, strategies must be developed to keep the price exactly where OPEC wants it.
With regards to the physical market, where oil barrels are bought and sold in order to satisfy actual demand, things look stable. This means that there is no urgency compelling OPEC to drop its production cap. At least until the situations with Venezuela and Iran have been properly assessed.

Trump Demands Immediate Action to Prevent Closure of Coal and Nuclear Power Plants

The President of the United States has repeatedly made it clear that his priority for the energy sector is to keep coal and nuclear power plants up and running. Trump has ordered ‘immediate steps’ to prevent the closure of coal and nuclear power plants. The administration is now reviewing a plan to step in and manipulate the US electricity markets in order to support generators that are unprofitable.

A number of power industry groups have criticised the decision, saying that there is no need to interfere with the market and that doing so would inevitably raise prices for consumers.

The White House spoke on the topic, explaining that the impending retirement of coal and nuclear plants will have a serious impact on the resilience of the power grid. It said that coal and nuclear formed a critical part of the energy mix of the US.

This came in the wake of a leaked memo, which outlined arguments in favour of supporting coal and nuclear plants. It stated that an increase in gas-fired plants and renewable energy would jeopardise the resilience and security of the country’s energy supply.

The memo continued to highlight the importance of promoting national defence and would persuade the energy department to exercise its powers under the Defense Production Act of 1950. The powers would allow the department to delay retirements of fuel-secure electric generation resources.

For two years, grid operators would have to purchase their power for a specified list of coal and nuclear plants, created by the government. This would have the effect of keeping the plants in business.

This proposal has sparked outrage among activist groups representing renewable energy and natural gas. It was also criticised by PJM, the operator of the largest power grid in the country.

Thanks to the rise in shale gas and the decreasing costs of solar and wind, gas-fired plants and renewable energy sources have dominated investment in power generation in the US. Coal plants are finding it hard to compete with these modern and more sustainable energy sources.

Despite Trump’s pledge to reignite the coal industry, there has been little success. There are over 2,000 more employees in the sector now, since November 2016, but the industry is far from safe. In 2017, coal-fired plants provided 30% of US electricity. This year they are expected to supply 29%, showing that Trump’s plan to increase coal supply has not yet come to fruition.

Furthermore, planned closures of coal-fired plants will reach their peak this year, since 2015. The energy secretary, Rick Perry, put forward a plan last year to intervene in electricity markets to prop up coal and nuclear plants. However, this notion was rejected by the FERC (Federal Energy Regulatory Commission).

The statement released from the White House shows Trump telling Perry to prepare for immediate action to prevent the loss of these resources. But, the plans have not gone down well, with several high-up officials noting that the proposals are going to cost more for consumers and businesses alike.

Experts have said that there is no current threat to system reliability and therefore no justification for government intervention in the electricity markets. If the government did intervene and compel customers to exclusively purchase power from specified companies, the damage to the market would be severe and costly. 

The Top 8 Energy Stories For 2018: Are Cities, States And Companies More Consequential Than Trump?

The world energy news continues to be dominated by Donald Trump. His doubters have hesitated to speak out as there is certainly something to said for going over the nation’s regulatory regime and reconsidering its configuration. However, critics still stand by the fact that Trump’s primary initiative is to undo Obama’s progress and undermine the science that underpins the research relating to climate change.

Fortunately, cities and states are taking matters into their own hands and are backed by American enterprise. Hopefully, their actions will outlast those of the president.

1. The Trump Organisation looks like it is going to pay out millions of dollars towards the clean up of a polluted site. The site was overseen by Donald Jr. and is known as Titan Atlas Manufacturing. The industrial site began in 2010 and failed two years later. This shows the president’s attitude towards the link between environment and business. If there is money to be made then environmental concerns are secondary.

2. In January 2017, the president signed an order to launch the Keystone XL Pipeline into action. The project has been on standby since 2008 and there were doubts about how many permanent jobs the pipeline would create. The drop in the price of oil also caused speculation as to the economics of the project, given that it was to cost in excess of $7 billion.

3. In July OFAC fined Exxon Mobil $2 million for violating sanctions on Russia. The breach was considered a reckless disregard for the sanctions, which barred U.S. entities from dealing financially with Igor Sechin, CEO of Rosneft, a Russian state-owner oil company.

4. Scott Pruitt, an EPA administrator, announced on Halloween that scientists who receive research grants from the EPA will no longer have a seat on the agency’s board. This means that hundreds of independent scientists will no longer be able to sit on the board but it will not stop scientists from private enterprise from doing so. Critics have blasted the move saying it is a blatant purging of independent scientists who may conflict with corporate interests.

5. Trump sent ripples through the world when he decided to withdraw from the Paris climate agreement, making the U.S. the only country in that world that is not participating. The aim of the pact was to keep temperatures from rising more than 2 degrees Celsius. Trump’s reasoning is flawed. He argued that he cannot create jobs and build an economy if he has to worry about a healthy environment. However, the U.S. economy has flourished recently whilst making great environment strides and renewable energy technologies are creating jobs.

6. Trump also ditched the Clean Power Plan and is attempting to resurrect the coal industry. However, market forces are proving stronger than the plan to roll back the proposed emission cuts. CO2 emissions were 18% less than in 2005 according to the EIA.

7. California has been busy creating and implementing a strategy to reduce carbon emissions by 40% by 2030 from 1990 levels. The move is in direct contrast with Trump’s position. By 2050 the state hopes to have reduced emissions by 80% and it believes that this initiative will create jobs.

8. Cities and states are certainly accelerating the low-carbon trend but it is the corporate world that is making things happen. Companies are listening to customers and investors and adopting technologies that will reduce emissions. Over 365 businesses have signed a letter asking Trump to go back to the Paris climate and Clean Power Plan.