By Thomas Heath and Damian Paletta
Thursday November 22, 2018
The swift and steep drop in oil prices has been the talk of Wall Street for several weeks and is good news for 30 million American travelers as they head into a busy Thanksgiving holiday.
But the dramatic decline cuts both ways, with several energy firms big and small seeing their stock prices fall even as President Trump cheers the lowest oil prices in more than a year.
On Wednesday morning, the president tweeted:
“Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!”
“He’s a piece of work,” said Nancy Tengler, chief investment officer at Heartland Financial. “It’s all supply, that is the issue. The U.S. is producing 11.5 million barrels a day. We are largest producer in the world. There’s just more supply than demand currently. If Saudi Arabia keeps pumping and exemptions to Iran stay in place, prices are going to stay low.”
The current surplus is largely attributed to a miscalculation between demand and output by major producers, including Iran. A strong dollar is also weighing on oil prices because it makes oil more expensive for much of the world. Oil prices tend to fall as a result.
Several companies have been shellacked by the price decline. Small- and medium-size independent oil companies that rely on fracking are seeing their profit margins erode, which is hurting stock prices. Newfield Exploration’s stock price is down 39 percent this year. PDC Energy shares are off about 30 percent. Oasis Petroleum is down 14 percent, and Apache Corp. has declined about 20 percent.
Benchmark Brent Crude and West Texas Intermediate both saw big price drops Tuesday but rallied Wednesday despite a report that crude stockpiles rose by nearly 5 million barrels last week. West Texas Intermediate was up more than 3 percent at $55.29 at 1 p.m. Benchmark Brent was up 2.2 percent at $63.94.Both are down more than 20 percent from their highs in early October.
The magic number is $50 per barrel. Much below that and companies start really hurting.
Oil entrepreneur Harold Hamm of Continental Resources has been one industry executive Trump has relied on for advice.
In an interview in January, Hamm said that “I’m not thinking at all that we’ll see extreme prices in the future around $80 or $90 a barrel. That’s not in the interest of producers around the world. We’re not trying to do that, and OPEC’s not thinking that either. When you read their rationale, it’s based on a healthy market.”
Hamm said that break-even costs for U.S. shale oil producers were as low as $35 a barrel and some as high as $45 or $50.
“But initially when OPEC started to flood the market, they thought high-cost production meant $70 in a lot of these [geological] plays,” he said. “What they quickly found out was that that was really wrong. That number kept falling. They realized ‘these guys could compete with us.’ That’s when they had to reverse their tactics.”
Frank Verrastro, an oil expert at the Center for Strategic and International Studies, said he anticipates more oil price volatility until the Dec. 6 meeting of the Organization of the Petroleum Exporting Countries, where he believes the cartel will cut production as it searches for a price close to $80 a barrel.
In the meantime, he said, “money managers are waiting for an event that will catalyze a change in price, whether it is a supply disruption, a geopolitical event or news that demand is stronger than thought.”
Verrastro said the president has his mind on one thing: keeping oil prices low, which is a huge boost to consumers.
“The president is thinking, ‘Happy Thanksgiving. I give you lower prices,’ ” Verrastro said.
U.S. giants Chevron and ExxonMobil both are down about 10 percent in 2018.
Oil is a boom-and-bust business. The price drops when supply exceeds demand. Producers pull back and slow production as a result of the price squeeze. When demand exceeds supply, producers start drilling again and the cycle picks up again.
The United States is the world’s biggest oil consumer at about 21 million barrels a day of the 100 million barrels produced daily worldwide. It is also a top oil producer, thanks to the shale oil renaissance over the past half-decade.
Oil and gas represent about 7.6 percent of U.S. gross domestic product. Low prices have a salutary effect across the economy, including moderating the rate of inflation. By helping to keep inflation low, low oil prices can stem the rise of interest rates, including for mortgages and auto purchases.
Oil prices dove quickly Tuesday on Trump’s endorsement of strong ties to oil swing producer Saudi Arabia, the de facto OPEC leader under fire for the October killing of journalist Jamal Khashoggi, a contributing columnist for The Washington Post.
Saudi Arabia’s willingness to maintain production is crucial to keeping oil prices low and the president happy. The oil giant was contemplating a cut in production at the December OPEC and non-OPEC meeting, which could raise prices.
Trump has repeatedly tried to insert himself into key economic decisions made by others, and has been particularly incensed about interest rates and oil prices. He believes low interest rates and low oil prices will help boost the economy, though he often dismisses concerns that White House interference in these decisions could distort markets.
For months, Trump pressured OPEC to lower oil prices, even jawboning the coalition on Twitter.
“Looks like OPEC is at it again,” he wrote. “With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!”
Trump has imposed severe economic sanctions against Iran, which limit the ability of other countries to buy Iran’s oil. The move was expected to drive up oil prices, which would make it more costly for consumers and businesses, but oil prices have stayed low in recent months.
In a move that limited the impact of the Iran sanctions on oil prices, however, the White House gave temporary waivers to eight countries that allowed them to keep buying Iranian petroleum, at least for a little while.
This week, Trump’s comments came as part of a strident defense he has made regarding his relationship with Saudi Arabia, dismissing assessments from U.S. intelligence agencies that top Saudi leaders were involved in the killing of Khashoggi.
Last year, Trump praised the economy’s performance, particularly the run-up of the stock market. As the market has hit turbulence, however, Trump has found other things to highlight.
Energy has been one of the hardest-hit sectors in the Standard & Poor’s 500-stock index, thanks largely to the decline in oil.The sector slipped 3.29 percent Tuesday, the steepest of all 11 sectors.
Steven Mufson contributed to this report.