Crude oil WTI spikes: The storm today after the calm yesterday

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No one in the oil industry wants to crash this party after what they’ve been through since mid-2014 when surging US production caused the price to collapse.

The benchmark US crude oil grade WTI spiked by 11% in early afternoon futures trading to $ 106.75 a barrel, the highest since June 2014 ($ 107.49 a barrel), before beginning to ease off just a tad. This is still far lower than where WTI was back in July 2008, when it closed at $ 145, and intraday hit the $ 150 mark.

WTI is now up 20% from a month ago and 75% from a year ago.

Crude oil WTI Futures, $ / barrel

Crude Oil WTI Futures, $ / Barrel (Author)

About 66% of crude oil consumption in the US in 2020 was in the form of fuels for transportation. About 30% was for industrial and commercial uses, such as by the petrochemical industry. About 3% was consumed by residential users, such as heating oil.

A spike in crude oil prices pushes up the prices of transportation fuels, and thereby the cost of transportation, from commuting and flying to shipping goods. Fuel surcharges are common in the shipping industry. Transportation costs are passed on in the form of higher prices of goods.

A spike in crude oil prices also pushes up the costs for all kinds of things, such as plastics, synthetic fibers for clothing, asphalt, building materials, etc., that manufacturers, in the current inflationary mindset, have no trouble passing on to the next entity in line and finally to the consumer.

A spike in crude oil prices like this are the last thing anyone needs when CPI inflation is already at 7.5%.

US shale oil producers can ramp up production very quickly and by large amounts, as they have shown in the past, which led to overproduction and the collapse in the price of US crude oil starting in mid-2014.

This collapse in price, which continued, led to the bankruptcies of dozens of US oil and gas producers in two waves, 2015-2017 and 2019-2020 – The Great American Oil and Gas Massacre, as I called it. At first, it took down smaller oil and gas companies. In the end, it took down the bigger ones, including fracking pioneer Chesapeake (CHK), the Occidental Petroleum spinoff California Resources (CRC), offshore drilling specialists such as McDermott (OTCPK: MDRIQ) and Diamond (OTCPK: DOFSQ), enhanced recovery specialist Denbury (DEN), and dozens more.

Over the years, investors lost hundreds of billions of dollars.

The survivors and bankruptcy-restructured companies are now all singing from the same page, the page of “discipline,” of not ramping up production and losing money, but of hanging tight and making money.

Crude oil production in the US peaked at around 13 million barrels per day in early 2020. Production plunged when the price of WTI collapsed in the spring of 2020. Production has come up some but remains about 11% below where it had been in early 2020 .

This chart shows how fast production was ramped up until the price collapsed in mid-2014, which caused some slowdown in production as oil and gas companies filed for bankruptcy one after the other. But then production began to surge again in the fall of 2016 after the price bounced off the bottom of $ 26 a barrel. And by September 2018, the price began to collapse again as production surged from record to record:

US crude oil production (MBPD)

US Crude Oil Production (MBPD) (Author)

Now the industry is in no hurry to increase production. The survivors are finally making money at these prices, and they have no interest in pushing down the price again.

But at some point, as prices rise, the temptation to increase profits will drive Wall Street money back into the oil and gas sector, and production will ramp up.

OPEC could also increase production – their negotiations for years have focused on how to keep production down – but they’re too in love with those high prices. No one in the industry wants to crash this party after what they’ve been through since mid-2014.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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