The oil market ‘is lying to us,’ oil execs say

Big Oil is making money but losing sleep. Of course, high oil prices are nice; We’ll find out just how good it will be next week when the big boys report their first-quarter earnings. But what goes up must eventually come down. Although U.S. oil executives and insiders worry that the disruption in the energy market resulting from the war in Iran will worsen significantly, they are not ready to increase drilling to counter it.

“The real problem is that the back end of the curve is lying to us,” Kaes Van’t Hof, CEO of Texas independent producer Diamondback Energy, said at an energy summit at Columbia University this week. He was referring to the widening gap between the high price of oil delivered today and the significantly lower price of oil futures contracts; This gap reflects Wall Street’s optimistic view that the Strait of Hormuz will reopen soon.

Van’t Hof said the low future price signal was both misleading – seriously ignoring the possibility of major impending disruptions for airlines, food systems and other energy users – and a disincentive for drilling investment: “I think you’ll see US production respond a little bit, but that’s nothing compared to the size of the problem, like putting a garden hose on an empty Olympic swimming pool.”

Backstage at the Columbia event, other energy executives and observers expressed frustration with what they saw as mixed signals from the Trump administration. publicly says the crisis is almost over However, the private sector is still urging companies to drill more and there are concerns about the possibility of an increase in US oil exports. Development celebrated by Trumpcould backfire by increasing domestic prices and fueling political momentum toward a crude oil export embargo; This is a move that could be disastrous for the industry.

Throughout the conflict, executives and observers told me, the administration ignored or downplayed well-known red flags about risks to the strait, waited too long to rally the industry, and failed to take preparatory measures that could have given the energy market some more flexibility and bought Trump’s negotiators more time.

Bob McNally, president of the consulting firm Rapidan Energy Group and a former energy adviser to President George W. Bush, told me that traders and U.S. officials have become very accustomed over the past few years to the idea that massive production in the United States could buffer any geopolitical shocks. They’re starting to be Pollyanna-ish now. “All barrel counters agree that the Hormuz disruption will cause a serious crisis due to shortages and price increases, but the broader community of macro investors and traders appears to have a more positive view so far,” he said. “It is extremely rare – although not unprecedented – for all barrel counters to agree, so someone is actually wrong.”