Viral Oil Prices and a Trump, Putin Phone Call

An Energen Corp. oil rig operating in the Permian Basin fracking province in 2018.

In November 2018, Alabama’s premiere oil and gas exploration company, Energen Corp., sold to Texas-based Diamondback Energy, just in time to escape the collapse in oil prices.

In spite of what you might guess, that collapse in oil prices was the dominant topic of the conversation between President Donald Trump and Russian Prime Minister Vladimir Putin on Monday, March 30.

First up, of course, was the virus crisis, but they quickly turned to oil prices, with Trump urging (as has Saudi Arabia) Russia to back off on production.

The price of the U.S. benchmark for oil, West Texas Intermediate, was trading on April 1 at $20.55 a barrel, compared to $61.59 the year before.

A look at the stock chart of Diamondback Energy, or any of the 33 U.S. publicly traded exploration companies founded on fracking of shale-oil reserves, gives an over-the-cliff view of Trump’s concern. Trading at $92.09 per share in January, Diamondback is down to $25.10 on April 1, a drop of 73 percent.

- Sponsor -

All of the shale-oil fracking industry is heavily indebted — backed by junk bonds issued by major investment banks, whose investments are seriously threatened.

The virus crisis amplified the oil price collapse, with economic downturn reducing energy demand, but oil prices were headed south well before the health crisis, beginning in 2018, as the U.S. fracking industry continued increasing output in the face of overproduction alarms. See Business Alabama’s “Know When to Fold Them — Energen Corp.

As prices dove from that point, Saudi Arabia tried increasing production to drive U.S. fracking producers off the world map. When that failed to work, the Saudis turned to Russia and began demanding that Russia join them in setting production ceilings.

Russia’s cost of production is a notch above Saudi Arabia’s and vastly lower than U.S. frackers, so they have felt no compulsion to do the bidding of their two top global energy competitors.

In November 2018, for the first time in decades, the U.S. became a net oil exporter. Almost all the increase in U.S. production that achieved this benchmark was owing to shale oil, which energy analyst Wood Mackenzie estimates is economically viable at oil prices of $60 per barrel or less.

The Permean Basin in West Texas and New Mexico is the largest province for shale oil production. It is where Energn Corp. was so successful, leading to its sale in late 2018.

According to data analyst firm Knoema, the per barrel cost of oil production by country, the lowest is Saudi Arabia, $10 per barrel, followed by Russia, $19.2. U.S. shale oil cost $23.4 per barrel and U.S. non-shale $21.

The latest Alabama business news delivered to your inbox