Nick Sciple: Probably most significant news has come out of OPEC plus.
When we say OPEC plus, we're talking about OPEC plus Russia and a few others.
On December 7th, a recent agreement to cut oil by 1.2 million barrels per day,
was a larger figure than had been anticipated. It's in the hopes that it'll stabilize oil prices.
We're down now about 35% off our four-year highs we saw back in October.
What are your thoughts about this cut and what it's going to do to the energy markets,
particularly oil, over the next year or so? Jason Hall: I think it's just a stopgap move.
Even the folks at OPEC and out of Russia -- it's funny, Russia has more influence over OPEC,
I think, than half of OPEC's own members do, which is interesting and strange.
But, yeah, I think it's a stopgap move, and I think they'd tell you the same thing. It's remarkable.
Oil is down by basically a third since October 1st.
It's a massive, massive drop in a pretty short period of time.
I think it is going to provide some stability, especially considering that the biggest source
of new production has been the U.S.
The Permian Basin has just been pouring new oil out at like a million barrels average
annual growth for two or three years now. But we're at pipeline capacity in that region.
That's going to carry out until late in the third quarter, early in the fourth quarter
of next year, before we start seeing pipelines coming on to start bringing more of that oil out.
I think this is going to give the market some of the stability that it needs to see
over the next six to nine months. But, there's a caveat.
That caveat is global demand.
Between fears of a trade war with China and the U.S. potentially stalling global economic growth,
if that weighs on oil demand, if the demand part of the equation changes quickly,
the market could get another shock.
But if you were to hold a gun to my head, I'd say a year from now, oil is probably going
to be where it is now or maybe a little higher. It's going to move a lot in between now and then.
We'll see what happens. What do you think?
Sciple: As always with these global commodity markets, it's difficult to predict what's going to happen.
We also had some unpredictable developments throughout this year.
In Libya, we had some militias shutting down some wells there.
Obviously, Venezuela's collapse has continued to play out.
It's hard to predict those sorts of things.
As more pipeline capacity does come on in the Permian, we're probably going to get more
supply coming out of there.
As you mentioned, if we see a little bit of a turndown in oil demand, that really could
lead to an oversupply problem.
The EIA has said that they don't expect shale production to slow, and that we may see some
oversupply going into 2019, barring, as I mentioned, some unplanned outages like we
might see out of Libya or Venezuela.
It's difficult to predict, but I think I probably agree with most of what you said there.
Let's go to this other story out of OPEC.
You talked about Russia having more control over what's going on with that cartel than
some of the members. There has been some discontent among membership in OPEC.
Qatar most notably, it's being called #Opexit.
They left OPEC after 57 years of membership.
Their Energy Minister said when they left that OPEC is an organization managed by a country,
in a veiled shot at the Saudis. They really had some conflict with them.
Qatar wants to push harder into natural gas. What do you think about Qatar leaving OPEC?
Is it a sign of any instability in that cartel going forward?
There are some other countries that have showed some discontent the way things are going.
Venezuela, Kuwait, Nigeria, Algeria have all been countries that have mentioned having
some friction with the leaders in the cartel.
Hall: I'll say right out, I don't think this is any sign that OPEC's about to break.
I don't think that's even close to happening. You have to look at the Qatar situation on an island.
Qatar has its own problems. Qatar and the Saudis, there are some serious issues.
But also, if you look at Qatar, I don't think a lot of people understand that Qatar is really
a natural gas producer. That's a significant part of what they do.
Honestly, I think it's going to get the benefits of geographically being in that same region
with most of OPEC, and OPEC's actions, and it's going to have a little more freedom being
separate from the cartel, especially in terms of its oil production.
But, again, natural gas and natural gas liquids are a bigger part of its business.
It's probably a little more noise than signal, in terms of what it really means for OPEC.
Hall: Sure. Just to mention for our listeners, with Qatar pulling out of OPEC, their oil production
is significant, but them not coming along with the cut that OPEC is doing and leaving
what the cartel is doing there is not going to significantly impact global demand or really
mess up the supply-demand dynamics we were talking about earlier.
Hall: Right. Thinking now from an investor perspective, I think this the key thing -- if you think about,
obviously, from a consumer perspective, how this affects our pocketbook with oil prices, that's one thing.
As an investor, the big takeaway is that if you think about what has happened over the
past three or four years across the oil and gas industry, producers of every size,
the private companies, the stocks that we invest in -- if a company has survived the past three
or four years, they've done it because they found a way to lower their production costs.
They're drilling cheaper, they're maintaining wells at lower costs, they're finding ways
to be more efficient with how much they produce. That's the key.
If you find the oil companies that are able to produce… you know, they are looking at
$40 for the breakeven -- I know that's a number that ConocoPhillips talks about -- understanding
how oil prices affect the economics of individual companies is the key thing.
If you're going to invest in the sector, in production, find your low-cost leaders.
That's where you're going to own a company that's going to be able to thrive at $50 or
$60 oil and is not going to struggle if oil falls back into the $40s or even lower.
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