Welcome change: cautious optimism in energy sector
EARLY in his first term, a Republican president who had survived a major election controversy saw U.S. consumer confidence at the brisk levels being recorded today. That was George W. Bush.
This week, another Republican will take office following an election that continues to generate controversy. Fortunately, Donald Trump’s victory is also generating optimism in a number of economic sectors.
There’s reason for hope in the oil and gas sector after years of slumping crude prices. This has little to do — yet — with Trump. But it doesn’t hurt that the next president considers fossil fuel a friend rather than an evil enemy.
This is of critical importance to Oklahoma and other producing states, whose economies are buffeted whenever crude prices decline. The effects extend well beyond the private sector, to the very halls of government where energy and environmental policies are forged.
An OPEC production cut is the prime reason for a halt in the price slide. News that broke on Friday the 13th bodes good fortune for the U.S. oil patch: Saudi Arabia has reduced its oil output to its lowest levels in two years. This, noted the Arab News, “has created a wave of cautious optimism.”
Optimism is an attitude and thus subjective. Earnings reports are statistics and thus objective. As reported Saturday by The Oklahoman’s Paul Monies, oil and gas firms in the region that includes Oklahoma returned to profitability in the fourth quarter for the first time in more than two years.
Chad Wilkerson, economist for the Oklahoma City branch of the Federal Reserve Bank of Kansas City, said hiring and exploration activities have returned to positive territory.
But Business Insider reported (also on Friday the 13th) that bullish sentiment for the energy industry is “showing early signs of abating, raising the possibility that the oil rally is running out of steam.”
Forecasts for the price of oil by year’s end are all over the map — as they usually are. A $58-per-barrel level predicted for the end of this year is informed but highly speculative. U.S. producers are skeptical that OPEC members will comply with an agreement to cut production to 32.5 million barrels per day. Still, the Saudi Arabia announcement is an encouraging sign that the energy supply glut will be attenuated.
The higher crude prices go, the more justified domestic producers will be in expanding exploration activities in high-cost fields. Obviously, the more successful those domestic producers are, the more the supply level will grow and the more any price rallies will be threatened.
OPEC members stubbornly refused to curtail production as the North American shale revolution expanded. When they finally did budge, no assurances could be given that individual members would comply with quotas.
It’s generally true that economic expansion boosts demands for energy and thus lifts oil and gas prices. Where the rubber meets the road is the consumer confidence level and the spate of rosy jobs growth news since Trump was elected.
Years of slow economic recovery under President Barack Obama could be overcome in short order. Signs abound that this is already happening. Investors take their cues in part from politicians and regulators. The cue cards now show every reason to believe that demand and prices will increase.
Cautious optimism? Yes. That’s a lot better than the lack of optimism we’ve endured for so long.