Oil flash crash?
We just had what some energy analysts called a flash crash in oil prices these past few days.
For those of us Oklahomans who are hoping for a strong, robust recovery for the oil and natural gas industries, this past week may have renewed some doubts. And for those Oklahoma legislators who are working on a new budget and praying their revenue estimates are met with a big recovery, they might need to plan for a less certain economic picture in the months ahead.
Friday saw a new five-month low for oil prices, after a 4-percent drop on Thursday and a larger than 3-percent additional drop overnight for U.S. West Texas Intermediate crude oil futures. Brent crude prices were similarly down on the global market on worries that rising U.S. output and Libyan crude returning to the market would extend the oversupply picture that has dominated the industry for the last year plus.
In addition, these lows were back to those levels that occurred prior to OPEC’s Nov. 30 announcement to curtail production levels for six months among its members by 1.2 million barrels per day and other major producers like Russia by another 600,000 barrels a day. On May 25, they will meet again to discuss renewing this agreement for another six months.
Other than the idea that a new agreement in Libya may calm that country’s production troubles and return as much as 1.5 million barrels a day later in 2017, the market impact seems to be borne by American production. On Wednesday, our government data showed that our inventories did not drop as much as expected and that American crude production continued to increase, creating a double-whammy to the supply picture. Similar supply news was reported by the Energy Information Administration for natural gas futures, which extended skeptics’ views on its cost recovery.
So what does it all mean? Well, your guess is as good as mine, but we can begin to see the signs that American producers may hold the key to their own industry’s fate more than ever in the last 40 years. Our unprecedented production success over the last decade is how we ended up in this current commodity recession gripping our industries and our state. Moreover, even as OPEC, which used to own the market swings by its own policies and production, works to stabilize the market with supply cuts, similar restraint may not exist here at home.
Thankfully, U.S. economic data is looking more positive than negative, although inertia seems to exist in several areas, and we might be able to power our own economic growth. Perhaps the test for us going forward is whether we can establish long-term stability in supply and demand to strengthen this weakened industry at home or whether we will rush to produce all that we can only to see the low commodity prices negate any economic upswing desperately needed by our producers and the state of Oklahoma’s budget.
Jim Roth, a former Oklahoma corporation commissioner, is an attorney with Phillips Murrah P.C. in Oklahoma City, where his practice focuses on clean, green energy for Oklahoma.