U.S. oil prices have rallied about 20% this month, reaching around $57 a barrel. The gain comes as uncertainty and fighting in Yemen spark worries over potential disruptions to the global oil supply.
Energy entrepreneur T. Boone Pickens expects the rally to continue, predicting crude will reach $70 per barrel by the end of 2015 and $90 per barrel in the next 12-to-18 months.
“You see what happened to the rig count. It’s gone down from 1,600 rigs operating on oil prospects to 700. The Balkan has turned over and is in decline and the same thing is happening in Eagle Ford in South Texas,” Boone tells Yahoo Finance, referring to the recent decline in production of shale within the U.S.
“Just last Friday we had to draw on Cushing [Oklahoma] oil where we’ve stored 62 million barrels, so I’ll be right on this prediction,” he says.
Production of oil in North Dakota is now officially on a downtrend, with some analysts predicting supplies in Cushing will continue to fall, easing the U.S. oversupply of oil.
The Keystone Pipeline and renewable energy
The Keystone Pipeline, Boone says, “is like a gift. It’s 250 billion barrels of oil sitting in Fort McMurray, Alberta, available to us in the United States.” 250 billion barrels, he points out, is equal to the amount of oil the Saudi’s claim they have in reserves in the ground.
“Why are we in the Middle East?” he asks. “It’s because of oil and here we have that much oil available to us and we don’t have to have any military to make it available to us.”
Alternative renewable energy isn’t where it needs to be says Boone. “You’re going to live with and deal with oil for a long, long time into the future,” and the Keystone Pipeline would make that much easier. Boone says he’s for renewable energy but wants to be realistic about cost. “Today you have to subsidize wind and solar and I’m not for that.”
OPEC vs. U.S. Shale
Boone runs “Pickens Plan” an organization whose mission statement is to end U.S. dependence on OPEC oil. But the oil magnate doesn’t believe that the cartel is overproducing to drive shale producers out of the game. “They produce 30 million barrels a day and there’s only one country in OPEC’s 13 countries that’s capable of overproducing—Saudi Arabia,” he says.
Instead, says Pickens, Saudi Arabia chose to keep production steady over stabilizing the market. “The United States…produced too much oil and dropped the price. We went from four million barrels a day five years ago to 9.5 million barrels a day,” Boone says. “We are now the swing producer and we will adjust it for market reasons, not because the government says ‘shut down your production.’ We’ve done it before and we’ll do it again.”
Boone Pickens told CNN Money that oil prices will be back to $70 per barrel by the end of 2015. Why is he betting against those who say oil will stay low? “Because I know more about it.” He said there were 1,600 (sic) oil rigs operating at the end of 2014. That is down to 700 rigs today, so the oversupply is slowing because there is less drilling. In addition, he said, the Bakken in North Dakota and the Eagleford in South Texas “have already turned over” meaning they are producing less.
“When the price [of oil] goes down, consumers are happy and politicians take credit for it when they don’t even know what they’re talking about.” Politicians don’t understand the oil industry. “Now they’re struggling with whether to export oil,” he said. “Sure, go ahead and export it. The U.S. producer should be able to go into any market he wants to.” He said Congress will have to change the law that limits oil exports – which goes back to the 1970s and the Arab Oil Embargo.
On the Texas economy, Boone said he didn’t think that Texas would fall into a recession because “I don’t think prices are going to stay down that long.” The price drop has impacted lower-wage workers, he said, but “within 24 hours of moving to Texas, a person is a Texan.” He said “the economy is better, the tax structure is better, and it’s easy to do.” If someone loses their job in the oil and gas industry in Texas “there are other jobs because the unemployment rate is around four percent, so there are jobs there.”
“If I were looking for a job,” Boone said, “I’d drive a truck. They’re looking for truck drivers.”
There were reports last week, since clarified, that a cargo ship was seized by Iran, but every day there seems to be a headline dealing with Iran. How does that affect Boone’s outlook?
Iran is “operating like a real country.” They claimed that after sanctions are lifted they could produce an additional million barrels of oil a day. “I don’t think they have the capability of doing that,” Boone said. “I think it’s closer to 200,000 additional barrels a day.” But overall, Boone said “you’re dealing with people who won’t tell the truth.” He said Secretary of State John Kerry is trying to make a deal with the Iranians “that no one wants.”
We don’t have to deal with OPEC or Iran (which is not a member of OPEC) because “the United States has plenty of resources and we do not need Mid-East oil.” Boone said he doesn’t think the President or John Kerry understand that because “they don’t understand the oil market; they don’t understand the oil business; and, what they do understand, they don’t like.”
Why is Boone predicting $70 oil by the end of 2015 and $90-100 oil by the end of 2016?
He said we had 1,509 oil rigs operating in the United States at the end of 2014. We now have 702. As rigs are taken out of production, supply drops. In addition, “wells drilled in the shale with a horizontal hole and multiple frack jobs decline very rapidly. The Bakken has rolled over [is declining in output], as has the Eagleford” shale play in South Texas, and the Permian Basin in West Texas isn’t far behind.
Last week, we drew from the U.S. oil depository hub in Cushing, Oklahoma, rather than filled, for the first time since oil prices dropped. That, he said, is an indication that supplies are falling and “and demand is very strong.” Supply coming down, demand going up “is perfect for increased prices.”
On the $70 billion acquisition by Royal Dutch Shell of British oil company BG Group earlier this month, Boone said Shell had announced that they couldn’t drill wells cheaply enough in West Texas, although a lot of companies are drilling and producing a lot of oil there. “I think Shell decided to play the ongoing industry by growing their reserves. BG was kind of a floundering company and Shell ‘picked them off.’” As prices rise, independents will be in better shape but “there will be some of these big independents that will be acquired by the Exxons, Shell, or Chevron.”
On alternative energy like wind and solar, Boone said “solar’s harder for me because nobody’s been able to show me where anybody’s made any money, yet.” He said he’d get back into wind energy. “I understand it, but I’d want $6 natural gas before I got back into wind.”
What keeps Boone going? He said he had three rigs that he shut down when oil prices dropped, “but when oil gets back up to $65, I’ll get back to drilling, and I have other places to drill.” He also said BP Capital operates five funds “and I have five teams made up of people I think are the best in the business running them.”
On long term investing versus quarter-by-quarter results and activist shareholders, Boone said that takes him back to the 1980 when Gulf Oil’s stock had never been over $35 dollars and “Gulf Oil was worth $85.” Today, there are men like Carl Icahn and Steve Cohen who “will jerk you around a little bit if they see value that you’re not getting for the shareholders.” Boone was asked recently about Icahn and said that back when Boone was active in that arena he was called a “corporate raider.” “Now,” he said, “Icahn is called an activist shareholder.” Boone went onto say that Icahn has made more money for shareholders than any CEO he could name, but when Boone described Icahn as “being as smooth as a stucco bathtub,” that drew a phone call from Icahn.