Go out to any gas station and it’s clear to see: fuel prices are dropping, and West Texas Crude Oil prices have been falling since October, which some experts say could mean the oil boom is about to bust.
Take a look at the numbers. Market data shows the stock price of Exxon dropped from a peak of $86.60 per share in late September to a low of $65.51 per share right before Christmas. Chevron had a high in October of $126.82 per share and dropped off to $100.99 per share the same day as Exxon. Dennis Elam, an economist at Texas A&M San Antonio, said this a common trend among energy companies.
While these stock markets did have a relief rally attempt in early January, with many of the companies’ stock prices coming back up at least somewhat, Elam said he thinks this is only a bounce, and not a full recovery.
“If you drop a dead cat off the top of the Empire State Building, it bounces when it hits the ground, but that doesn’t mean it’s alive,” Elam said.
The market is flashing many cautionary signals, Elam said. One of the biggest signals is the offshore drilling company Transocean, which was trading at $6 a share two weeks ago, which Elam said is about a quarter of the company’s book value, the total value of the company’s assets.
“Typically, when a company trades below book value, it’s either a great buy, or in a hell of a lot of trouble.” Elam said. “If we look all the way back to the financial crisis in 2008, that is lower than Transocean was trading at the bottom of the market in March 2009.”
When these companies are trading at prices so low, Elam said it can be a sign that oil production is about to slow down significantly. Energy service companies are also trading at low values, Elam said, like SPDR Oil & Gas, which was trading for $10.62 a share as of Friday.
“If things were gonna get a lot better, people would be buying these energy service stocks, and they’re not,” Elam said.
Kirk Edwards, an Odessa oilman and Latigo Petroleum president, said the main reason for the slowdown is due to Saudi Arabia producing an extra million barrels a day through the months of November and the end of December, causing a tremendous amount of extra oil to show up in the U.S., which put pressure on the prices to come down.
“Since that time now, for the last three weeks to four weeks, Saudi Arabia has cut back a million barrels a day, and we’re seeing this price come slowly back to the $50 mark,” Edwards said. “But producers in West Texas really need somewhere around $60 to $65 to be healthy and continue their plans that they have committed to earlier for the rest of 2019.”
The price of oil all depends on what Saudi Arabia and other OPEC members do, Edwards said. When they overproduce, the price goes down. When they cut back, the price goes up.
“Luckily, a lot of producers in West Texas have hedged at higher numbers during the year last year and that is why we didn’t see a market drop off in rig counts that you may have thought happened with oil prices hitting that level,” Edwards said.
Oil companies can offset price drops within the next one to two years by strategically placing hedges when prices are good, Edwards said, which many local companies have done.
While the oil price is dependent upon OPEC members, Elam said these countries don’t have many other options as far as production goes.
“They have nothing but oil to sell,” Elam said. “Half of the Russian economy is oil. You’ve got a country like that that’s just totally dependent on oil, and it’s often hard for them to cut back.”
Wes Burnett, the economic development director at the Odessa Chamber of Commerce, said his office hasn’t seen any oil downturns, and that he spoke with Michael Wise, executive vice president of Permian Strategic Partnership, who told him they didn’t seem concerned at this point.
“His comment to me was basically there’s no panic yet,” Burnett said.
Whether a bust is about to happen, or oil prices really will recover, Elam said he expects the answer shortly.
“The market is telling us they don’t have a lot of confidence in what’s going to happen,” Elam said. “I think the next two weeks will tell the story.”
