Sitton: Texas Plays Swing Producer Role

Sitton: Texas Plays Swing Producer Role

Sitton: Texas Plays Swing Producer Role

Oct. 3, 2016
By Trevor Hawes

OPEC last week committed to reducing its oil production quota during an informal meeting in Algiers in hopes of reducing the global oil supply and raising prices, which has pressed several nations into dire straits. While the deal won’t be finalized until the cartel’s formal meeting Nov. 30 in Vienna, markets quickly responded and sent oil prices and several oil company stock prices higher.

Railroad Commissioner Ryan Sitton on Friday shared with the Reporter-Telegram his perspective about what this means for the Texas oil industry, particularly for the Permian Basin, which has weathered well the two-year price downturn.

MRT: Why do you think OPEC is committing to curb production?

Sitton: We know that a majority of OPEC’s members cannot survive at oil prices where they are today. There have been really aggressive efforts among most of its members to try and curtail production to push prices up. The internal strife is you have some OPEC nations — Saudi Arabia, Kuwait and others — that are more interested in market share, but that doesn’t represent the large majority of the OPEC nations.

I think this latest thing tells us that the voices have tended to get louder to get a deal done, and the nations that are more interested in market share have found it in their best interests to curtail production and send market prices up. That part’s obvious. I think the more subtle piece is, this is representing a little bit of a shift to get prices up, even if it may mean giving up market share.

MRT: Is the decision an indication now that the U.S. is indeed the swing producer?

Sitton: Let’s define swing producer. The swing producer is the entity that fills the market when demand is growing and takes production off the market when demand is shrinking. In the new normal, where you can put new oil on the market in a matter of months and pull oil off the market as a result of quicker decline, obviously Texas is playing a role as swing producer not because of artificial market controls, but because this state can respond to the market quickly.

I think that this is a sign that we’re going to take more and more of that swing-producer role because of the fact that we dropped our production a bit as a nation and as a state in response to down commodity prices. We’ve already played a role in curtailing production.

What I think you’ll see when commodity prices come up is Texas will be the first place where production will increase. However, we have to take into consideration that OPEC is still artificially controlling the market through production agreements. They’re still going to have a role to play in that capacity, too.

MRT: OPEC’s quota reduction figures vary between 200,000 and 700,000 barrels per day. Will that make a big enough impact to lift oil prices significantly?

Sitton: Aside from all of these market moves, I’ve seen the market move that way anyway because demand has gone up. A reduction of 700,000 barrels a day will cut any remaining excess production out of the market. That could be balanced out by increased Iranian production, but I do think those are big enough moves because they close the gap.

I think at its biggest, in 2014 the oversupply was about 2 million barrels a day. If you pull 700,000 barrels out, that’s 35 percent of the total global oversupply. That’s a meaningful number and will help push prices up, on top of the fact that demand is going up around the world and the fact that other counties have already cut production. Put it all together, and it just further supports what I’ve said for the past year: 2017 is going to see a pretty good price increase.

MRT: A deal won’t be final until OPEC’s November meeting. Do you think they’ll go through with it?

Sitton: I don’t claim to be an expert on OPEC’s decision-making politics, but I take the reports at face value in that right now a lot of the OPEC nations are looking for a commitment from Iran to control its production. The Iranians seems to have given some soft indicators that it might not be willing to cut but at least hold production. Iran does that, I think OPEC will absolutely make that move.

MRT: The Permian Basin has been strong in the downturn. Do you think it’s in a good position to respond to rising oil prices?

Sitton: The Permian Basin is in an unbelievable position when oil prices come back. There’s talent there; there’s investment there. There are nice, brand new horizontal drilling rigs sitting idle near the airport, and when prices come back, that’s the first place to see a significant increase in activity.

MRT: How about the Eagle Ford?

Sitton: The Permian and Eagle Ford will ramp up because they’re easy places to get oil to put on the market, but the Permian has the added bonus that if you decide to quickly respond, even if the market doesn’t last and falls to $45 a barrel, production can still generate cash flow. You will see activity increase in the Eagle Ford, too, just at a slower clip.

If we see prices hit into the $70s, you’ll see activity across the state increase. In that range, there are a lot of areas in the Eagle Ford that can be cash-flow positive.

MRT: Has the public been asking you a lot about OPEC?

Sitton: I’ve gotten a lot of emails over the past week that have noted I’ve been saying for months that I’ve been predicting $60 oil. After all of these announcements, they wonder if there’s something I know that they don’t know. The answer is that I’m looking at the public data just like everyone else is. In my role as railroad commissioner, I’ve done a lot of studying of it, and we know that these overseas producers really need higher energy prices to sustain their local economies. So, I don’t have any inside information. It all just makes sense.

MRT: So you can say safely on the record that you don’t work for OPEC?

Sitton: [Laughs] Yes. I don’t have any inside knowledge that anybody else cannot get from reading all the information made publicly available. It’s probably worth saying because some readers might think I have an inside scoop because I’m a railroad commissioner. I just spend a lot of time studying what’s already out there. It’s amazing how much you can learn.

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