Party like its 1999.

While oil prices in the short term are fixed on the Fed and current over supply, in the big picture it may be time to party like its 1999.  In 1999 oil prices had just come off a year in 1998 where oil prices had dipped as low as $10.35 cent per barrel and there was doom and gloom across the energy space. Yet in hindsight oil in 1999 was at a historic turning point and a major bottom that changed the energy landscape for over a decade.

There are so many similarities about what is starting to happen in the energy space now it’s almost eerie. In 1999 they were saying many of the things that we are hearing about oil today but looking back it was dead wrong.

For example, what they were saying about China and their demand for oil was wrong. In 1999 a dour assessment about their oil demand from the Energy Information Administration said, “Economic developments in Asia over the past 18 months have weakened worldwide oil demand and lowered world oil prices – a trend that is likely to continue for several years.” This sentiment became ingrained and there was denial by many oil market watchers even as Chinese demand continued to defy expectations. This year, while oil demand in China has softened, their imports are well above a year ago.

In fact according to Bloomberg, China’s crude imports rose in September from a three-month low, as the world’s second-largest consumer sought bargain barrels for its reserves and their refiners boosted processing. Overseas purchases rose to 27.95 million metric tons last month from 26.59 million in August, according to preliminary data released by the Beijing-based General Administration of Customs on Tuesday. That’s equivalent to 6.83 million barrels a day, up 8.6 percent from the previous month.

Back in 1999 market watchers and big banks talked about the never ending glut of oil as OPEC overproduced to maintain market share. There was no adherence to quotas in the Cartel because no matter what, one of the countries would start to cheat on those established quotas and the rest would follow.

The Economist wrote an article in 1999 called, “Drowning in Oil”. They wrote “What”, sneered Abdurrahman Salim Atiqi, Kuwait’s one-time oil minister, “is the point of producing more oil and selling it for an unguaranteed paper currency?” In 1973, when most people feared that nothing could stop greedy OPEC members from raising oil prices as much as they chose – though not this newspaper, which forecast an oil glut – the producers affected to accept western cash for their black bullion out of charity. Now the long oil-price odyssey seems at an end. Since its peak in 1980, the price has fallen erratically. It has plunged by half in the past two years alone. In real terms, oil now costs roughly what it did before 1973. Crude is gushing from the ground at the rate of 66m barrels a day, half as copiously again as in OPEC’s prime. The world is awash with the stuff, and it is likely to remain so.”

The Energy Information Administration warned in 1999 that non-OPEC oil production was expected to increase more rapidly. Contributing to the growth was a near doubling of production from the former Soviet Union by 2020 (primarily in the Caspian Sea oil fields), new fields in the North Sea, and increases in the offshore regions of West Africa. Mexican oil production would continue to expand, and the rest of Latin America was projected to increase production by more than 50 percent, particularly in Brazil and Colombia. Lower OPEC production and higher non-OPEC production then would mean that OPEC would not dominate the world oil market until later.

Energy companies were bleeding cash and it set of merger mania as energy companies big and small had to do whatever it took to stay alive. In 1999 Exxon Corp. and Mobil Corp. agreed to an $82 billion merger that created the world’s largest publicly traded oil company which sounds kind of cheap in this day and age. Not long after in 2001, Chevron Corp. and Texaco Inc. merged to create the world’s fourth-largest investor-owned oil company, known as ChevronTexaco for a mere $45 billion dollars.

In 1999 The Economist wrote, “low prices will gradually put most such areas out of business – especially if cash-strapped Gulf states conclude that the best way to increase revenues is to boost production, which could drive prices from today’s $10 to as little as $5 (see article). The world will then again depend on a few Middle Eastern countries for half its oil, up from a quarter now.

At least for the moment, three of these countries – Kuwait, Saudi Arabia and the United Arab Emirates – are staunch western allies. But Iran and Iraq are not; and the whole of the Gulf is unstable. All the region’s governments are suffering from the decline in the oil price. Most are repressive and unpopular. None has a sure hold on power. If the Saudi royal family, in particular, were overthrown, it would send oil markets into turmoil. Once low prices move more production back to the Middle East, even a toppled emirate or two might be enough to cause disarray. It is no use hoping that a rebel government would keep the oil flowing at any cost. Remember the revolution that overthrew the shah of Iran in 1979. It cut supplies for only a few months – but was enough to trigger the second oil shock.

So, back to the present. Reuters is reporting that U.S. shale oil producers, having slashed fat from 2015 budgets after a 50-percent drop in crude prices, risk cutting to the bone next year as they pare spending further and get ready for a prolonged downturn. Top shale companies including Devon Energy Corp, Continental Resources Inc and Marathon Oil Corp this week released preliminary 2016 plans for capital spending that may fall by double digits.

The cuts, following reductions of 30 percent to 40 percent by many in the industry this year, would leave budgets at a fraction of levels seen during the height of the shale boom that lasted to mid-2014. Lower costs and improved productivity would allow them to hold shale oil production largely flat.

So to the long term bears – a warning from the past as was written in 1999. But just as oil’s scarcity seemed a fact of life in the 1970s, its abundant flow might be too easily taken for granted today. Normality could last a while; but it is unwise to assume that it will endure forever. Be careful of that 1999 party!

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Giovanny Betancur
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