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, Washington Post reported.
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.”