Oil sector: Don’t get distracted by dem Wirbel
No one seems to be using the word jittery about oil prices at the moment, but it seems appropriate under the circumstances. Some countries are reimposing Covid-19 restrictions in the face of increasing cases and struggling healthcare systems, and this has had a dampening effect on the price of oil. Meanwhile, rising tensions in the Middle East have given the falling prices a defined floor, at least for the moment. It’s a complex scenario that seems to have no end in sight. Depending on your perspective, though, the short-term price changes are a distraction, what is called in German der Wirbel or the churn. Longer-term, the oil industry needs to be taking this opportunity to address some of its more fundamental issues, suggests Kay Rieck, an experienced professional oil and gas investor.
The news over the last week or so has quietened the optimistic voices that had been suggesting that we might see USD100 per barrel by the end of the year. Brent Crude futures dropped back to just under USD70 per barrel this week, well, down on the USD77 per barrel enjoyed in at the start of July. West Texas Intermediate crude futures endured similar falls, contracting from highs of USD75 per barrel in the middle of last month to USD68 per barrel as we get towards the mid-point of August.
As I suggested at the start of July [LINK], this period in the oil sector was always likely to be a case of two steps forwards, one step back, with every positive development tempered by something equally concerning pulling in the other direction. Jittery is a good word for it.
The point is though that this is always the way that the oil sector has always operated. And to be fair, most financial markets operate on pretty much the same principle. Sentiment is a question of balancing buy signals and sell signals, short- and long-term potential and positive and negative information, which in turn is influenced by events coming out of parallel, and sometimes not so parallel, sectors.
Calling the market is incredibly difficult. At the moment it is complicated by both the short-term impact of Covid-19 and the long-term challenges to oil’s crown from alternatives and the discussions about the natural resources sector’s role in the changing climate.
Control what you can control
The oil industry can’t do much about Covid-19. The pandemic is going to run its course. The industry needs to ensure the safety of its workers according to the best advice from governments, who are in turn reacting to changing circumstances (sometimes too quickly, sometimes too slowly). Beyond that, 2021 is simply a page in the history book that has to be survived with as much dignity as possible.
As I have suggested before, though, the industry can do something about some of the long-term challenges. It is completely within the power of individual organizations and the sector as a whole to look at ways of reducing waste to combat some of the negative perceptions that currently afflict it.
Some of the remedies will be expensive and as a result pretty much off the table for now given the economics of 2021, but there are several relatively low-cost ways that the sector can proactively combat waste. If these are put into effect and data harvested that shows where they have been effective, the sector will be likely to be in a far better position to discuss the future with regulators and potentially enjoy better reception among investors and the wider public.
Managing waste more effectively is also good for balance sheets, so in many ways it makes good business sense, even if you think that the public relations aspects are a distraction.
It is of course hard to say whether the industry will engage effectively with these challenges, and there is always the potential for an unexpected event beyond Covid-19 that could change the economic dynamic. What is clear though is that the oil sector holds its future in its own hands. Irrespective of what prices do in the short term, in the longer term it needs to find ways of delivering value for money to shareholders, regulators and communities.
We don’t know where prices are going to go. It is not impossible that they could indeed start to move towards the US$100 per barrel market as we come into the final third of the year. Prices are certainly significantly healthier than anyone really expected them to be when they were being discussed at the start of 2021.
There are short-term challenges that are well beyond the industry’s control, and long-term issues that the industry would do well to address. The price of oil is always an important factor in whether a project goes ahead, but it is easy to get distracted by short-term market movements. Don’t get diverted by dem Wirbel.
About the author
Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets, building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilising his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Haynesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.