Price malaise may last a while
PRODUCERS SHOULD POSITION THEMSELVES TO SURVIVE AN EXTENDED PERIOD OF SUB-$70 PRICES
JIM HARDEN, HEIN, HOUSTON
THE PAST COUPLE OF YEARS have not been the best of times
for producers of US commodities. This is particularly true for
domestic oil patch operators, who continue to struggle with a
pricing trend that has by no means been friendly to profitability.
Since peaking at $60 per barrel in June 2015, the price of West
Texas Intermediate (W TI) crude oil took a sharp nosedive to under
half that price before rallying to the low-$50 range by the end of
2016 and has languished between $45 and $55 since. While people
are optimistic to see $60 to $70 oil prices sooner than later, there
are signs that this might not be the case.
There are a number of reasons to believe that this cycle may
not be a temporary event, and that producers will need to position
their operations to survive an extended period of crude oil pricing
below $70 per barrel. Here are three key trends fueling this
THE US DOLLAR VS THE EURO
Oil is a global commodity that is transacted in US Dollars (USD).
For that reason, the recent strength of the Dollar against most
EDITOR’S NOTE: This article ran previously on Hein’s website.
It has been republished here with permission.
other developed market currencies – particularly the Euro – has
dampened oil price growth (see Figure 1).
Interestingly, when crude oil hit its pre-recession all-time high
in July 2008, the USD hit its all-time low against the Euro. More
recently, the US economy has continued to gain strength at a rate
greater than most other advanced markets, resulting in a stronger
Dollar that has driven the exchange rate on the Euro down to under
$1.10. The coefficient of correlation (r2) between the USD and W TI
was greater than 0.73 r2 over the past 10 years and over 0.94 r2 since
While a strong Dollar policy was initially favored by the fledgling
administration of President Donald Trump, in recent weeks the
tide has seemingly turned, with Treasury Secretary Steve Mnuchin
saying an “excessively strong Dollar” might hinder short-term
economic growth. However, continued US job market strength,
rising government debt levels, and upward pressure on interest
rates – combined with continued Eurozone debt issues – will make
it difficult for policymakers to weaken the Dollar’s near-term
What’s the bottom-line? As long as the US Dollar remains strong,
it makes US exports more expensive on world markets. If the current
Dollar-to-Euro exchange rate remains near parity, W TI oil prices