Week-in-Review: Are Energy Prices Coming Back? A Cautionary Tale
International benchmark Brent crude has now spent more than seven days above $35 a barrel – and it was above $36 a barrel all of this week.
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Reuters noted that it’s up a quarter of its value since hitting $27 a barrel on February 11th. While U.S. crude inventories rose to a new record of 517.98 million barrels last week, output fell for a sixth straight week to 9.08 million barrels a day, according to data from the U.S. Department of Energy’s Energy Information Administration.
So, is Brent back? If you’re reading MetalMiner and asking that, you haven’t been paying enough attention. DO NOT FALL FOR SHORT-TERM PRICE INCREASES! You need to look at that underlying trend. Non-farm payroll data will come out later today and many are looking to that report to give more information on U.S. and overseas oil production but, even still, we’d caution that oil is far from coming back to even its recent norms — 60 per barrel — and this increase could be short-lived as supply as those inventory numbers are still plenty high.
Oil won’t be giving the metals you purchase a boost anytime soon via higher production and transportation costs, either. Even if these prices can be sustained they’re not yet a significant enough jump to increase those downstream costs.
So, What DID Happen in Energy, Then?
So, then nothing really happened in energy this week? Oh, boy, no.
Earlier this week former Chesapeake Energy CEO was indicted by a federal grand jury and accused of conspiring with an unnamed competitor to rig the price of oil and gas leases in his native Oklahoma. McClendon — along with former Chesapeake founding partner Tom Ward — is credited as being an innovator in horizontal drilling and hydraulic fracturing leading to the US shale oil and natural gas boom.
McClendon’s rise was not without controversy and he was accused, in 2012, of taking out more than $1 billion in personal loans, to finance drilling costs, from firms that were lenders to Chesapeake. His personal lifestyle — using Chesapeake resources — also became an issue. Chesapeake’s debt load, itself, eventually forced McClendon out of the company in 2013. He went on to found American Energy Partners shortly thereafter.
Even after being indicted McClendon was defiant facing the charges.
“The charge that has been filed against me today is wrong and unprecedented,” McClendon said in statement. “I have been singled out as the only person in the oil and gas industry in over 110 years since the Sherman Act became law to have been accused of this crime in relation to joint bidding on leasehold.”
The indictment followed a nearly four-year federal antitrust probe that began after a 2012 Reuters investigation found that McClendon discussed with a rival how to suppress land lease prices in Michigan during a shale-drilling boom. Although the Michigan case was subsequently closed, investigators uncovered evidence of the alleged bid-rigging in Oklahoma.
McClendon made his statement on Wednesday. Then, on Thursday, McClendon died in a fiery, one-car crash.
Several witnesses placed emergency calls after McClendon drove his 2013 Chevrolet Tahoe directly into an overpass, according to tapes released Thursday by the Oklahoma City Police Department.
McClendon was killed when he suddenly crossed the center line and struck the wall at a high rate of speed, crushing his sport-utility vehicle’s front end and engulfing it in flames, police said. The Oklahoma City police say it will take a week or more to investigate what happened to McClendon and if the crash was, indeed, a suicide.
We may never know if McClendon was guilty of rigging bids and fixing prices, but he can serve as a cautionary tale of how loose monetary policies and risky bets fueled what was, undoubtedly, a positive boom in American energy production. That the market had to mature beyond the ways of wildcatters like McClendon is a good thing for domestic energy.
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While his risky bets on oil and natural gas paid off big for Chesapeake’s early growth, they also ended up forcing him out. All purchases have elements of risk and reward, especially in the competitive energy markets. Don’t let your risk outweigh potential reward.
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