US Oil Is Booming and It's Upending Global Markets

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1:24Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, remember a couple years ago, you know, when like oil prices started booming and there was this big story that like production wasn't coming back, that all these oil companies had found discipline. They're all focusing on profits, et cetera, not just volume. And that the expectation would be that production would be depressed for a long time. Wait, I don't think it wasn't that production was ever coming back. It was that production would slow substantially. And the idea was that this is one part of the oil boom story of the sort of mid 2010s that always fascinated me was it was actually a capital market.

2:08So it was all these investors who just poured money into shale oil, basically, and thought they were going to make millions and millions. Shale completely overexpanded. It became very, very difficult for them to actually pump at a profit. And so they all started collapsing. They all started pulling back. All the investors got burned and they were like, we're never going to touch this industry with a 10-foot pole ever again. And then lo and behold, in sort of the early 2020s, shale starts to become profitable again. It starts to expand. It says it's expanding at a more disciplined pace than previously, but I have questions about that.

2:48But yeah, it's all changed. It's all turned around. Yeah, I'm glad you brought up that capital markets aspect. And that did seem to be this idea of depressed production seemed to be all part and parcel of that, that suddenly financial conditions were tightening, that the market was placing this premium in this new non-ZERP world of cash flow today, et cetera. And so I'm still confused. What exactly happened with that story. You know, there's lots of things as production has come back. It seems like investors are still into the space. Prices have come down. Then there's all kinds of obviously geopolitical stuff going on.

3:27It seems like it's a time to sort of take stock of what's going on in the energy world. Yeah. Well, U.S. oil production in particular. Yeah. I mean, I think that's an all time high. Actually, if you look at domestic production in the U.S., I think it's something like 13 million barrels of crude per day and 20 million, including, you know, LNG and things like that. So an all time high. And it means that U.S. oil basically accounts for one of every eight barrels of global output. So pretty big stuff there. Yeah, pretty extraordinary. So what happened to all the narratives? Is production coming back?

4:08Why have prices fallen? And I'm very pleased to bring in the person we always love to turn to when it comes to oil and energy. We're going to be speaking to our colleague, Javier Blas, Bloomberg Opinion Columnist on Oil and Energy. Javier, thank you so much for coming back on OddLots. Thank you for having me again. Javier, what is the deal with that? So like we're back at records again in the U.S. production? We add to record levels and it's just an incredible number. As Tracy said, if you look just at what we say is crude oil, it's more than 13 million barrels a day. But if you add on top of that number, other things that they go into the oil liquids streams or like condensates and NGLs or natural gas liquids, a bit of ethanol, et cetera, et cetera.

4:53We are well above 20 million barrels a day of oil production. That compares to 100 million worldwide. Right. So you put everything together, the U.S. is producing one in five barrels of oil consumed. That is just an incredibly high number. And it doesn't seem to be about to stop. Probably it's going to slow down a bit in 2024, but it's going to continue to go up. OK, where is all that new oil actually coming from? Because it's been a while since I've brought up the rig count chart. But if you look at the rig count chart, I mean, this is such a fun one because you can see the big humps of the early 2010s and then the big slide into 2015.

5:38And now it seems kind of flat. So there's been some increase between 2020 and 2022. The number of new rigs being drilled has gone up. But it's not like we're seeing a boom in new gas rigs and new exploration. So where is all this oil coming from? Well, it's coming from the very same places that it was coming about 10 years ago, but it's coming in some way, for lack of a better word, better. So it's coming from Texas, it's coming from New Mexico, and it's coming a bit from North Dakota, Oklahoma, etc., etc. It's coming from the shale regions of the United States. But if we were to say where in just one single or two, or in this case, three single words, is Texas and New Mexico.

6:25That's where the new oil is coming. And you're right, Tracy. The rig count is not significantly up. Actually, if you look at it from a loan perspective, it's lower than it was during the previous booms of shale. But it's just that the oil companies in Texas and New Mexico have got very good at extracting more oil from those rigs, from those wells that they are drilling. And they are also doing much longer wells. If you think about how an oil shale well looks like, it first goes down vertically, and then it just turns around 90 degrees, and it goes horizontal for a while. At the beginning, those horizontal wells were relatively short, perhaps, you know, a quarter of a mile, half a mile at most.

7:12Now they're going as much as three miles horizontally and that they can get a lot more oil that they were able to do a few years back. So it's important. We're going to talk a lot about the capital markets and investor aspect, but it's important just like ongoing technological improvements as well. What else is happening on this sort of... Oh, can I read? Sorry, I never get a chance to do this. Can I read one of my all-time favorite leads from a story that is all about technological improvements in oil drilling. Okay, okay, Javier, Joe, you guys are ready. I'm gonna read it. Okay, this is a story from 2016.

7:49Last spring, Statoil announced it had used the same oil well design and components to drill three reservoirs for the price of one. While the specs for Norwegian sea drilling might provoke reactions akin to the oil field's name, the snore. Such standardized pipes and casings could hold the key to a pervasive mystery about today's energy market. Why is everyone still drilling when prices are in the basement? Snore, get it? Oh, that's good. Maybe you have to read it. So that really held up well. So what's changed since 2016, Javier? Well, technologically wise, we can drill longer, particularly the laterals.

8:29We can pump fracking fluids at a higher pressure. And companies are also very good at doing this super quick. Previously, a well could have taken 30 days. Now it takes 10. The just companies and the crews have got very good at doing it. And that means that they can do it cheaply. And that's the funny part of the whole boom of 2023 and 2024. A difference of the previous ones, companies are making money and investors are making money. So everyone is loving it. This is the first time and this is what really terrorized OPEC. This is the first time that shale oil is growing and making money at the same time.

9:08And that's a big problem in your Saudi Arabia. Definitely want to get to the possible response from OPEC. But just in terms of technology, I mean, one of the things and the reason I brought up that story, it was the idea of standardization. So before you used to have all these bespoke custom fittings for oil rigs or platforms or whatever. But then I think there was actually like an industry-wide effort or attempt to start standardizing some of these things so you didn't have to order a bespoke component for every single oil project that you were doing. And that seems to have helped make things go faster, to Javier's point, and also brought down costs.

9:48Javier, how much of a big deal is that in the industry? It is a big deal. I mean, it has happened everywhere were in the oil industry, let me give you my favorite anecdote of a standardization in the oil industry. So you are working on a North Sea oil platform. This is offshore, outside Norway and the United Kingdom. You need to paint a lot of the stuff yellow, kind of, you know, yellow danger, very visible, et cetera, et cetera. Very stormy areas of the wall, the North Sea fog. You get the kind of, it's not the kind of place that you really want to spend an evening in winter there. So every company have their own shade of yellow.

10:24There were 19 different kinds of yellow to paint things in the North Sea. Each company has their own shade with their own specification. And it was just ridiculous. So at one point, a few engineers in the industry got together and said, well, this is a bit ridiculous. I mean, can we not just do like a yellow North Sea? And so they go together and everyone decided this is the shade of yellow that we're going to use. And now everyone is painting everything that they need to paint in yellow with the same shape. That at a much bigger scale has happened across the oil industry. Everything has got a standard.

10:59And companies within themselves, they like to do everything bespoke. They really, in some ways, gold-plated a lot of projects. So each well was a bit different to the other one. Now companies are designing one single design. And when they have really thought, OK, this is it. This really works very well. now copy and paste for the next 25, 50, 100 wells. And that has cut costs significantly. I love the fact that like just as something as simple as the color painting on the other. I'm imagining a room full of oil executives looking at different swatches of yellow and being like, no, that one's too orange.

11:36Can we get something a little bit more buttermilk maybe? I would love to be the competition lawyer who has to shop around the meeting to make sure that no one is saying anything inappropriate that the Department of Justice could get us. There was a conspiracy for the yellow color. Yeah. I'll look at the different Pantone shades, but got to do so in a legal way. All right. Let's talk about the capital markets aspect because it did seem like the way people thought about it was that the industry had to face a choice. Would it be pursuing volume or would it be pursuing profitability? And as you've just said, like, there seems to be this very weird situation in which volume is ramping and productivity is sustained.

12:17How is that happening? And how sustainable is that? Well, to the question of how long and how sustainable, I'm going to be honest, I don't know. I thought that production growth will have a slowdown in 2023. And it never happened. It did the opposite. They accelerated. If you look to every oil executive, if you look at the forecasters of the industry, everyone is saying it's going to slow in 2024. But also they said the same for 2023 and they were wrong. So we'll see what happens really. But yes, I mean, the industry went into this new era thinking about profitability. So everyone cut capex, everyone tried to get more efficient, and everyone thought that production growth was going to slow down because the focus was profitability.

13:02The fact that they were able to grow quite strongly came a bit of a surprise to the industry, and then everyone kind of celebrated it. But here there is a very important question. If OPEC had not cut production to make room for all this new shale oil from the United States, prices will have come down, and then the industry will have faced the same kind of dilemma of the past. You are producing too much, then the prices come down, your profitability comes down, and then you have a problem. So a lot of these that we are putting based on efficiency is true. But if not for OPEC cutting production and keeping prices above$70 a barrel, then shale companies will be in trouble.

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15:08HR, and more. No more app overload. No more juggling logins. Just one seamless system that makes work easier. And the best part? Odoo replaces multiple expensive platforms for a fraction of the cost. It's built to grow with your business, whether you are just starting out or already scaling up. Plus, it's easy to use, customizable, and designed to streamline every process so you can focus on what really matters, running your business. Thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com. One thing I'm really curious about is who is actually funding production now versus, say, in the early 2010s?

15:53And just to add on to that a little bit, is there any difference between private and publicly traded domestic U.S. players? Okay, so let's go from Parso. On Tracy's question, who is funding this? Well, back 10 years ago, five years ago, it was Wall Street. It was a mix of equity and credit markets, which were funding all of this growth through different instruments. I mean, sometimes it was just issuing of fresh equity. Sometimes it was bonds, high yield bonds, reserves lending, where a bank is lending to an oil company based on the reserves underground, more or less like a mortgage rather than a house.

16:29You mortgage the oil reserves that they are underground. And a lot of that is still there, but a lot of the money now needed for the expansion and to financing all this new growth is coming from cash flow generation. It's the internal cash flow of these companies. They generate enough cash to pay for all the new drilling that they are doing, to pay for all the capital investment that they need to do alongside new pipelines, et cetera, et cetera, and to pay their shareholders. These companies now, for the very first time, are paying dividends. And that sounds like, well, companies, publicly listed companies, will be paying dividends.

17:09That's like normal. Well, that was not the case a few years back, but now they generate enough cash to do all of the both. And in terms of, is there a difference? Yes. Publicly listed companies have been a bit more cautious. They have been trying to, They have the shareholders, they have Wall Street on top of them, and they have to really try to focus as much as possible on paying dividends and buying back shares. Private loans, they don't have that pressure, that super strong pressure. So they have done a bit more of growing. And there is a suspicion in the industry that a lot of that growth was to try to maximize the amount of production that you are doing so you can sell yourself to a big player, say ExxonMobil or Chevron.

17:52And perhaps that's not as sustainable as it looks like. Talk more about OPEC, because you mentioned that U.S. shale has benefited from OPEC cutting production. You know, I remember, I guess it was 2015, I think, when OPEC did that huge increase in production to try to kneecap U.S. shale. Why are they sort of, I guess, in alignment these days where OPEC's impulse to maintain production is good for OPEC, but also, I guess, clearly, as you say, benefiting U.S. production? Well, OPEC is trying to keep oil prices as close as it can to$100. It's not as successful as they will hope. Prices have been between$70 and$80, despite a lot of geopolitical tension that you believe mine will have pushed prices even higher.

18:37I think that the key question here is that OPEC is convinced that this is a bit of a blip, that at some point, the growth in US production slows down, the demand remains there, the annual demand growth remains there. And then they have room to expand their production, to bring some of the production that they have taken off the market now, they will able to bring it back. And that was, to be honest, the same kind of bet that OPEC made in 2011, 2012. You know, this is a blip. US shale growth is going to slow down at some point. And after a few years, by 2015, 2016, they kind of discovered that actually, no, this is not working.

19:17At$75,$80,$100 oil, these guys can grow, and they can grow forever. We need to change the strategy. And that's when OPEC decided to flood the market, kill prices, the price of West Texas and Brent crude, the two global benchmark, collapsed to$30 a barrel. And that's what really brought down shale growth for a few years. The jury is out whether they are making the same mistake or not. And I think that we are going to see it by the middle of this year, at most Q3 of this year. We are going to see whether US shale really is slowing down or not, and whether demand is either sustaining the growth or we are beginning to see a slowdown in demand because, you know, all electric vehicles and more energy efficiency, etc., etc.

20:03So this is a very important year for OPEC, because if it doesn't really go as planned, OPEC really needs to change the strategy completely. What can it do in that scenario? Well, they can only do two things. One is to accept that, you know, the one current prices of$75 plus, they need to cut even more production, giving shale more share of the market. Or they accept that they need to bring prices down because shale can grow at$75 and perhaps cannot grow at, say,$50 or$40. And then OPEC and that Saudi Arabia puts a lot more production into the market and triggers a crash. But that means lower prices for OPEC.

20:46Yeah, and it didn't really work the last time because it just incentivized everyone to cut costs and streamline and become more efficient. Indeed, you are absolutely right. And both options means lower revenue, either because you are producing less or because you are accepting lower oil prices. But if the strategy of OPEC doesn't work, and I am not really 100 % sure that OPEC really has much of a strategy of the next six months, I think that they are holding the line for the next six months and then they will see what they do. But if they are wrong, it means a period of low revenues for OPEC countries.

21:19And that will be very painful. Just in mind, lower revenues, when you have experienced a significant increase in inflation, that means that the purchasing power of your barrel goes even lower. That's very painful for Saudi Arabia. This is a slightly off topic question, but shale producers in the U.S. cannot join OPEC, right? Because we do not like price fixing cartels. I think that the Department of Justice may have one or two. Yeah, they might have something to say. Yeah. Yeah. You know, like, no. I mean, it's not it's not a completely, you know, it's not a crazy question, Tracy. Texas. I know it's come up every once in a while.

21:59The state of Texas sent observers to OPEC meetings in the 80s. They never joined, but actually they sent observers. And the state of Alaska also sent observers to the OPEC meetings. I mean, there will be, you know, an American gentleman sit down during the OPEC meeting as an observer. I mean, I think at some point, cool heads and some legal advice decided that that was not very cool. It's funny the things that one remembers from the sort of fever swamp days of spring 2020 during the peak of the pandemic. But I just remember there was some railroad commissioner in Texas. And of course, the railroad commission in Texas is the oil regulator.

22:38There was some railroad commissioner who was trying to do diplomacy with OPEC in the middle of... I can't remember his name, but it was some guy on Twitter. Do you guys remember that? Yes, there was someone, and I cannot remember 100%, but I will come back on the name. Yeah, there was some random guy, some random regulator in Texas. Let's not forget that when OPEC and OPEC +, which is this alliance between OPEC and other oil producers, including Russia, they were negotiating how to respond to the pandemic and just basically trying to agree how to split 10 million barrels a day. cut, 10 % of global oil production was taken out of the market by OPEC and his allies.

23:19A lot of the negotiations, Donald Trump, at that point, President Donald Trump was heavily involved. I mean, the whole final deal was effectively cooked on a three-way phone conversation between President Donald Trump, President Vladimir Putin, which was still, you know, negotiating these things with the White House face-to-face effectively, and King Salman of Saudi Arabia. So the U.S. in some ways, it was not part of the cartel or anything like that, but it was participating in the conversations. And Trump got actually quite a sweet deal because he got the Saudis and the Russians to agree to cut production while the U.S.

23:57industry cut absolutely nothing. I think his name, he even wrote a Bloomberg opinion column in March, March 20th, 2020. Ryan Sitton was his name, the railroad commissioner who called on OPEC to coordinate with the US in constraining supply. I want to pivot for a second and talk about the Red Sea. And we talked about it a couple of weeks ago with the context of container freight. What does the rising tensions there? We recently saw the US strike at Houthi assets. What is the rising tension there mean from an oil perspective? Well, it's more or less a binary situation. As long as the Strait of Hormuz, which is the big outlet from the Persian Gulf for countries like Kuwait or Saudi Arabia into the open markets, as long as that remains open, what's happening on the Red Sea is of less importance.

24:50Yes, it's going to mean an increase in cost because a lot of the oil tankers and also the LNG carriers, this is liquefied natural gas carriers, they are going to have to divert, avoid the Red Sea and go around Africa. that adds from the Persian Gulf into Europe, that add probably a good 10 to 15 days extra. So, you know, it's not as small and it could really increase the cost of shipping, but it's not the end of the world. And that's why the oil market is taking it quite relaxed. I mean, prices has barely increased over the last few days. But then you could think, well, okay, so that is basically on a scale of one to 10, probably that's a two, maybe a three.

25:33What is the other scenario? Well, the other scenario is the, you know, open fight with Iran, not with his proxies, the Houthis in Yemen, but actually with Iran. And the Strait of Hormuz from somehow gets in trouble. Shipping is more difficult through it. Probably it's not completely close, but things get really bad. And that on a scale of one to 10, that's probably 25. And that's the problem. That's what I say. It's a bit of a binary situation. At the moment, are we in La De? Well, so far, not so bad. Could it mean that more LNG gets exported from the U.S. to Europe? That seems to be the obvious solution, right?

26:09Yeah, the obvious solution is that all the Atlantic LNG goes into Europe. So that's the U.S., but also it's Nigeria, Trinidad. That's going to go as much as possible to Europe. And then all the non-Atlantic basin LNG goes to Asia. So Qatar will try to redirect as much of the LNG that they can into Asia. I could provide some trading opportunities for LNG exporters in the United States. And let's not forget, that means also more Russian LNG is going to remain in Europe rather than going into Asia because Europe continues buying LNG from Russia. I mean, we stopped buying Russian gas through pipeline, but LNG is free for all.

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