Doha Catharsis: More Short-Term Discomfort Should Lead to Proper Recovery

This post also available at my LinkedIn page.

If you totally unplug from energy industry news on the weekend, you’re probably just reading this Monday morning that the Doha foreign oil producers’ meeting ended without a deal. This shouldn’t really have been a surprise, given the manner in which Iran and Saudi Arabia have been throwing geopolitical shade at each other in a commodity-based game of chicken. In fact, there is a pretty reliable pattern of OPEC and foreign non-OPEC participants talking up markets into meetings only to seemingly let oil bulls down when they ostensibly leave without an agreement in place (cue ‘The Price is Right” tuba sounder). We all want energy prices to rise into what I’ve often referred to as a “happy zone” – where producers can profit and jobs are created, but where drivers, shippers and the economy at large isn’t punished with excessive fuel prices.

However, I think that in order to have a better recovery longer term, it’s crucial to go through a proper bottoming process. Had a Doha deal been struck and WTI prices marched up into the $45-50/bbl range, some producers would have been preparing to ramp up production (e.g., Pioneer Natural Resources is expected to start up rigs again at $50/bbl). Allowing shale producers to ramp up said production would benefit those who are financially distressed whose ejection from the industry and energy market is vital for future growth.

Through the ashes of bankrupt and financially-wracked energy companies the seeds are sown for the energy industry to emerge upward like a phoenix (and WTI prices, to boot). If this production kicks back up in earnest before the supply and demand lines on the WTI graphs begin to cross one another (demand preparing to outpace supply), prices are doomed to this $35-45/bbl zombie price range for several years.

The industry seems to be through the worst of it. Just a little bit further.