Worldenergy Blog

Is the US ready to the be swing player in a resource war?

Tuesday, July 07, 2015

How do oil prices, a Greek crisis, and Russian gas fit together to make the US a swing player in a resource war?

Most of the oil price coverage today suggests that we are heading into a bear market.  Prices are hovering in the $50-$60 range currently.  OPEC production has remained consistent and over reported targets.  Global demand, while steady has some shown some potential weakness in China and India, both swing players?  The US economy has not been “booming” for anyone except the Obama Administration and shale production remains steady.  In fact last week actually showed a slight increase in the rig count, which is surprising.

Questions around a “nuclear” deal with Iran further complicate the story; just how much oil does Iran have in floating storage that could be dumped on the market when sanctions are lifted? Then there is the big gorilla in the room, what happens if Saudi and Russia and Iran begin to work together and strategically deploy resources?  That could be very ugly for the price of oil and for the Untied States as a whole.

Additionally, it was reported that Russia was looking hard at Greece and its gas supply contracts.  Why is this important?  Russia has a history of using natural gas to achieve political agendas.  By putting pressure on Greece, Russia might see this as an opportunity to weaken the European Union or to send a signal to the EU that if it cannot pay for gas, Russia will exact retribution.  Of course, right now the very future of the EU is being called into question as we all ponder a Greek exit, followed by a shift in the UK.

Could this signal a move by Russia by use its resources to garner favor with European countries, as the EU weakens, at the expense of US interests in the region?  Quite possibly, a Russian based energy block that included OPEC countries with customers all over the world could give Russia an advantage as it seeks to assert influence over others.

But how could the US play in this game of hydrocarbons?  Currently the US does not export oil, so we cannot attempt to offset stress in the system caused by a Saudi/Russian/Iranian alliance.  We could however play on the lighter side of hydrocarbons and utilize our natural gas as a counter balance.

Currently the US is building export terminals in the Gulf of Mexico and on the East Coast to send natural gas as LNG to the international market.  As the schedule goes, Cheneire is almost ready to begin shipping gas.  The timing of this is very important, as the EU is dealing with a potential break up right now and with summer soon to transition into fall demand for natural gas in Europe is going to rise.

Should Russia decide to once again put the squeeze on Western Europe and demand price concessions or withhold gas, things could get interesting.  Russia may also decide that Ukraine like shifts in the political structure of some countries is required before they will agree to ship gas.  If they do, the US may be the only player in the market who could offset or soften such impacts.

Currently natural gas in the US is trading at sub $3.00, with lots of supply in the ground to keep that price low.  The US natural gas industry has been experiencing the pain of operating at these low levels without any relief in sight.  An ability to ship gas to the international market could create another gas boom in the US.  We currently have an enormous amount of surplus drilling rigs that could be put to work very quickly.  By all reports a whole lot of capital is sitting on the sidelines waiting to be deployed once the future market picture becomes clearer.

So could the US be sitting on the edge of a gas revolution that goes beyond our shores and influences global events in the very near future?  Signs point to this as a possibility.  One of the main questions surrounding this theory is will the current administration help or hinder?  Will we be able to move quickly enough to make a difference is another very good question.  At the end of the day, we can see the pieces lining up on the chess board, are we going to participate in a meaningful way, only time will tell.