Industrial Distribution magazine recently published an article by Mike Hockett, managing editor, that read “Oil Will Rebound to $70, but not until 2020”. It goes on to explain that OPEC released its World Oil Outlook and it continued by saying that oil will move to $95 per barrel by 2040. Recently, oil prices have fallen to their lowest levels in 11 years, since July 5, 2004 and oversupply is the culprit.
I saw another article online at Bloomberg.com that read “Oil Bankruptcies Reach Highest Quarterly Level Since Recession”. The article said that at least nine U.S. oil & gas companies that accounted for more than $2 billion in debt have filed for bankruptcy in the fourth quarter. Since peaking in October, 2014, U.S. oil & gas employment has fallen by 70,000 jobs, according to analysts for this report. The article continued, “The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016. That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers”. The article finishes, “Even a plunge in U.S. output may not be enough to drain a global supply glut that has almost 3 billion barrels of oil and products like gasoline in developed countries’ storage tanks, according to the International Energy Agency. The world will likely be oversupplied by about 1 million barrels a day through the first half of next year before balancing, Jeffries LLC analysts including Jason Gammel said in a Dec. 18 research note”.
There has been a lot of infrastructure spending on fracking that looks like it will be all for naught. From the Dakotas to the Ohio/Western PA/West Virginia area to Texas and up in Alaska. They all thought they hit the lottery. In Ohio, I saw more Texas and Louisiana license plates than I had ever seen before when I traveled near the Marcellus Shale area. Companies like Wilson Supply were shipping products from Texas to support the oil drilling and fracking, then more recently local suppliers were enjoying a nice increase due to the fracking. And it all happened really fast, like within five years or so. I guess some producers will continue to produce from their best, most cost effective areas. But, what once was going to be a new gold rush now looks pretty grim. I recall on one of my first trips into that area someone was explaining how land owners were selling their land to companies like Chesapeake Energy. I was told, “those farmers are selling their land for ‘Oprah money'”! I imagine you are kicking yourself right now if you held on to your land hoping for a bigger payday.
How could this all happen so quickly? It makes you wonder about our entire energy approach to energy. The coal industry is getting battered in some of the same areas where the oil money is drying up. I remember reading headlines saying that one day we would be paying $20/gallon for gasoline. Seems pretty unlikely now.
What is really tough for us in the fastener industry is the lost opportunity to supply parts into the oil & gas & coal industries. I know a lot of companies that formed specific business units specifically to go after that type of business.
I’m not sure how all of these bankruptcies affect financial markets but it cannot be good. Who’d have imagined that we would not need to produce as much energy as possible? There was a lot of money invested into these fields that is soon just going to disappear. It’s like money just evaporating, kind of like the value of a large Florida home during the housing market meltdown. When homes were not being built, sales of building supplies and home appliances got hit pretty hard. Some industrial suppliers are similarly feeling the oil & gas sting. And it all happened so quickly. I guess you have to chase business when the opportunity presents itself but things change so quickly anymore. Just ask Cardinal about putting all your eggs in one industry basket.