This Billionaire Shale Oil Magnate Has Something To Say About The Oil Industry

Harold Hamm, the founder of shale oil producer Continental Resources, may not be a well-known name in Singapore.

But for investors in listed oil & gas companies here such as Keppel Corporation Limited (SGX: BN4), SembCorp Marine Ltd (SGX: S51), Ezion (SGX: 5ME), and more, Hamm’s thoughts may be worth considering.

That’s because Hamm, one of the most out-spoken commentators on what is happening in the oil market, is one of the pioneers in the development of shale gas and shale oil assets in the U.S. and is a billionaire today because of his efforts in the industry.

Shale oil, while still accounting for only a single-digit percentage of the global oil market, has had a big impact on the price of oil due to its rapid growth.

What is happening to the oil market

A few days back, in an interview with CNBC, Hamm had openly accused the Organization of the Petroleum Exporting Countries (OPEC), in particular Saudi Arabia, of being predatory in their pricing. He said:

“We’re in a predatory pricing environment. That’s what’s happened. The Saudis turned 1.8 million barrels on, and basically their intent was to drown us. But they’ve not got that done. It’s been a monumental mistake for them, I might add, a trillion- dollar mistake.”

Beyond Hamm’s accusation, there is one other thing worth noting in the quote above and that is, his thought that OPEC’s attempt to drive US oil producers out of business is not working and might backfire instead.

In the CNBC interview, Hamm mentioned that speculation of a possible initial public offering of Saudi Aramco – Saudi Arabia’s state-owned oil company – could be a sign that Saudi Arabia is struggling with its finances with the low price of oil.

The timing of the potential IPO of Saudi Aramco – in one of the worst business environments for the oil & gas industry over the past decade – may also signal that the company is having a really tough time as well.

Moreover, differences in opinions among OPEC’s members is also a likely indication that the low oil prices we’re seeing currently is unsustainable for both OPEC members as well as non-OPEC producers like the U.S. shale oil companies.

What happens next

From all the above, it can be assumed that the current low price of oil might be unsustainable. However, how long it can last is anyone’s guess. In my opinion, at least one of the following two scenarios need to occur before we might see some improvement in oil prices.

  1. Non-OPEC producers such as the U.S. shale oil companies need to fold their operations so that oil supply from their wells will significantly decrease. In such a scenario, OPEC members might then go back to their normal state of operations and control supply instead of flooding the market.
  2. A cut in production from OPEC members who cannot sustain their economy with such low oil prices, thereby letting the price of oil stabilize at a higher price point.

I’ve painted a picture of what needs to be happen, but at the moment, both sides – OPEC and the U.S. producers – have not reached their breaking points yet. Thus for now at least, it seems to me that low oil prices may be here to stay. It’d also be interesting to see who ends up breaking first.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Keppel Corporation.