Are We Near The Bottom Of The Oil Pricing Freefall?
The West Texas Intermediate settled just above $30/barrel yesterday, ending a seven-session drop in pricing just when some thought we'd hit bottom. As some analysts discuss the possibility of $20 oil, Houstonians are looking at their real estate with increasing trepidation. Get some valuable insight at Bisnow’s upcoming Impact of Oil & Gas on Commercial Real Estate event, where experts will discuss the economics and perspectives on Houston’s development landscape. Read below for a sneak peek from Tim Relyea and more.
First, the good news for owners: Cushman & Wakefield executive vice chairman Tim Relyea says some buildings were predominantly leased beyond 2020, and that may help some landlords ride out this downturn. Yet Tim (shown here at daughter Brooke's wedding; she's in the biz too, working as an associate at Cushman & Wakefield) admits he does not think the market has bottomed out and he questions how long the downturn will last. But having survived other downturns over his almost 40-year career, he also knows other indicators to watch for clues on what the market may do. As the energy economy is shifting gears and continuing to decline, Tim will also be eyeing interest rates and tracking whether raising rates further curtail new developments.
New projects already in the planning stages prior to plummeting oil prices have clearly taken a hit. Energy Architecture principal Russell Kelly says even the most savvy owners didn’t prognosticate the depths of pricing moves, or react as quickly as they wanted to. Subsequently, capital plans have been slashed for many service and exploration/production companies. The opportunity with these clients may come in consolidating facilities and reallocating physical resources.
And then there are the companies outside of traditional O&G parameters, like engineering and tech companies in California or old-line industrial companies in China and Korea. “We're watching ‘outside’ groups with either disruptive technology or lots of capital moving around the edges of the business. We're doubtful about those groups having a large impact, but a few ‘game changers’ could be out there,” Russell says.
Beyond the impact of how oil prices are affecting development, Hillhouse Resources managing director and University of Houston Energy Fellow and lecturer Ed Hirs thinks strategically about how the price got to where it is. Ed says there are misconceptions about how the market works, and that it’s important to understand the fundamentals to be able to look ahead. Ed is pictured here at the UH Energy Independence Symposium.
The Econ101 version is that crude prices dropped for two reasons—over the past year, the value of the dollar has shot up tremendously, and demand hasn’t grown as quickly as supply. Oil is the only commodity traded internationally in US dollars, and OPEC inched oil prices up to maintain purchasing power during the decade-plus run of the Fed’s rapidly increasing money supply. As for the supply of oil, it’s a scenario that’s already played out with natural gas. The advent of the shale plays in the US brought more product to market at a time when other global supplies increased. In mid-2014, OPEC began cutting the price of crude to its best customers in Asia and has continued the price war to protect market share and build new demand in the face of increased competition from coal and natural gas in Asia—OPEC’s largest market.
Ed said it in a 2013 Forbes article about the shale boom, and he still stands by the statement today: “In short, if OPEC simply declines to reduce its own production quotas in the face of growing US oil volumes, the American producers could grow themselves right out of the money.”