Chris Faulkner, CEO of Breitling Energy, often dubbed in the media as the “frackmaster” because of his staunch support of hydraulic fracturing, is warning of panic in the Texas oilfields, as the oil price plummets. He predicts the US fracking boom will end if oil stays in the 30s, and a return to conventional drilling which can be sustained even if the price drops to just $20 a barrel.
“It’s looking ugly,” he said. “It looks like a double-handle technical pattern with a trading range below $35, and the bottom now really is only psychological. $30? Below? We’re into prices not seen since 98/99.”
He postulates a scenario where we could be headed toward more parity between supply and demand.
“The latest escalation between Saudi Arabia and Iran dates back a while, but has been flared most recently by the Iranian sanctions discussions, primarily advanced by our President Obama. These tensions are two fold – Iran’s unquenchable thirst to participate in international commerce again, including oil flow, versus Saudi Arabia’s intense desire to prevent them.
“However, what is going on is not an “event.” It may be a precursor to an event, but minus an event, I don’t think it’s going to affect oil prices much at this point.”
“What we do have impending is a reduction in spare capacity. The world is consuming about 96 million barrels of oil per day, and supply is ahead of that by about 750,000 barrels. If the US reduced by 500,000 barrels by this spring, which I think is very possible, then we’ve almost eliminated all the spare which puts us on very thin margin with such tensions building in the Middle East.
“After the fracking revolution took off, we grew production in the US by about 500,000 barrels per day for three years straight, and we’re still producing 9.22 million barrels per day. But if that drops by 500,000 barrels as I expect, then we have indeed become the swing producer by default.
“I’m mostly bullish on oil prices going into 2016, at least back toward 50. But it will be a slow climb – by mid-year perhaps – with the WTI/Brent spread still tight as it is now.”
He doesn’t see a lifting on the US export ban affecting things greatly.
“I just don’t see us exporting a little oil moving the needle on prices or supply. All the oil is in the system already, now it can just move around more efficiently to the refineries that are ready for it today.”
“As far as Iran’s oil coming to market, their only buyer right now is China, who has been snatching it at a discount. Nobody else needs their oil, so I don’t think it’s going to have as big an impact as all the gloom and doomers think. With the economic news from China that rattled the market recently, I don’t see demand increasing any time soon.”
“The bottom line is the Saudi/Iran conflict could be a flashpoint but until there’s something that affects supply, it’s not going to drive oil prices. However, US production decreases will, and the conflict puts us in a position of possibly reading parity between supply and demand and once traders embrace that, it very likely could move prices upward.
“But like we say with gasoline prices – they tend to float up like a feather and drop like a rock. We’ve already had oil prices drop like a rock, and from a producer’s perspective, right now we’d be happy as could be if they’d begin floating up like a feather.”