Cheap oil is double-edge sword
President Trump has been tweeting about the benefits of low oil prices, but sometimes you had better be careful of what you tweet for. Indeed, low oil prices can be a positive for consumers and businesses but at the same time, it could send the wrong message about the economy and could also derail the U.S. energy revolution.
Ahead of OPEC's meeting on Thursday, in which the group agreed to cut production, Trump taunted the group with a tweet.
We have just seen that the biggest crash in oil prices since the 2008 financial crisis is raising fears about the global economy and causing pain for U.S. oil producers. The oil price selloff was in part caused by Trump’s tweets and inaction on Iranian sanctions. While the president might have been happy to have cost OPEC big money, he must remember that the U.S. is now a major energy producer and the industry creates a lot of high-paying jobs.
Oil prices were rising for most of the year because of strong global economic growth, as well as the fact that Trump was promising harsh sanctions on Iran. He sent a signal to the market that it was his goal to reduce oil exports from the rouge state to “zero” by November. He tweeted that OPEC should raise production ahead of the sanctions and U.S. oil producers did so as well. When Trump granted waivers to the biggest buyers of Iranian crude, the oil price rout was on.
At first, the price drop was welcome but now there is concern that the crash in oil prices is sending signals, false or otherwise, about slowing growth and reinforcing negative feelings and potentially causing a slowdown in business investment. OPEC was surprised and angered by Trump’s about face on sanctions, but so too were U.S. pipeline and oil producers. Many of these firms rushed completion of pipelines and tried to raise output to try to make up for the Iranian shortfall that never came, and it cost them a lot of money. Now with oil getting close to $50 a barrel, many shale companies will struggle.
On FOX Business earlier this week, Marathon Petroleum CEO Gary Hemminge said that where prices are right now could already have a significant impact on U.S. shale drilling. That in turn could have a negative impact on the U.S. economy as shale oil has become a much more significant part of our economy. Reuters reported that drilling activity in the Permian Basin could fall 10 to 20 percent next year if prices do not rebound. The Wall Street Journal reports that shale companies require higher oil prices in order to come out ahead if expenses are taken into account. Citing data from RS Energy; all-inclusive break-evens are about $51 in the Permian, $57 in the Eagle Ford and $64 in the Bakken.
Low oil prices can be good if they are low for the right reason. If they are low because economic growth is slowing, then obviously that is not good. Crashing oil prices may also send the wrong signal to the economy. While we know that the reason that prices are crashing is because Trump allowed wavers on Iranian oil, the depth of the crash may reinforce fears about a global economic slowdown. You can tweet yourself into trouble if you are not careful.
Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report.