HH Has Oil’s Problem Been Solved?


Over the weekend, there was a surge of excitement in Houston, where I live, over the potential selection of Rex Tillerson, the CEO of Exxon Mobil, as Secretary of State.

Given that Houston has about 1/10th of its economy focused solely on oil drilling and exploration, and has been hit hard by the downturn in oil prices, the announcement is perceived to be the solution to the oil problem. I spent a good bit of time talking about the issue with my friends at Fox26.

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Yes, there is little doubt that between the perceived cuts to production from the recent OPEC meeting, the selection of Tillerson as Secretary of State, and now former Texas Governor Rick Perry being considered for the Department of Energy, the psychologically “bullish” backdrop for oil prices is in place. However, do any of these events address the long-term headwinds of oil to any significant degree?

With respect to the oil cuts, this is the 4th cut in production by OPEC since the turn of the century. These cuts in production did not last long, generally speaking, but tend to occur at price peaks, rather than price bottoms, as shown below. This is because OPEC talks much about cutting production prior to the act so prices tend to front-run the actual decision.

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With respect to Tillerson, his selection as Secretary of State bodes well for increases in global oil production and pipeline building in the future along with reduced regulations on oil production in the U.S. Furthermore, as I stated in the interview, look for removal of sanctions against Russia which will revive the previous Exxon/Russia dealings.

However, the last thing we need is MORE supply as it is the current levels of production of oil which remains the core problem currently. Increasing supply potentially creates a longer-term issue for prices globally particularly in the face of weaker global demand due to demographics, energy efficiencies, and debt.

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