GUEST POST - Bakken Update by Michael Filloon - How much did Sen Heitkamp's vote for the Iran deal hurt North Dakota?

Today was an interesting day in the oil markets. We saw prices swing to the downside. Most importantly, Saudi Arabia's Oil Minister, Ali al-Naimihad commented about the upcoming production freeze. He thought a deal would be done sometime in March. This is important, as the market has been more interested in the possibility of a cut in production. Many believed that OPEC and the Russians may be interested in a production freeze, knowing Iran would add production now that sanctions have been lifted. It is possible that Iran will add somewhere between 300,000 and 700,000 bbls/d of oil to an already saturated market. OPEC and Russia are motivated to try and push that production number down, but I believe Iran will produce as much as possible in order to increase revenues.

The Saudi oil minister also commented on a production cut, which some thought could occur in 3 months, if the production freeze was adhered to. He stated there will be no production cut, and stated that the market would determine who stays in business while inefficient and uneconomic producers will have to get out. The Saudis continue to say there is no war on shale, but their actions seem to target it.

The biggest issue is world supply that is approximately 1.5 million barrels more than demand. Although demand continues to pick up, the addition of Iranian barrels makes the downturn much more difficult (especially for North Dakota). The signing of the Iranian deal will put Bakken specific operators out of business. Iranian barrels, which have a lower operating cost, will replace Bakken barrels in the future. Since operating costs are higher in ND than just about any other mature unconventional play, it will affect our state more than others.

Adding to the negative news, the API reported an increase of crude inventories of 7.1 million barrels. If this is correct, US storage will be at 511 million barrels. US operating capacity for storage is 521 million barrels. This is an important story to watch, as many believe if US storage is almost full, world storage is probably in the same boat. The oil markets are very tight, and a production freeze does nothing to stop additional barrels being added to storage. Unless the market is balanced prices will continue to trade in a very low range.

Michael Filloon
Co-Owner and Portfolio Manager Hartstreet LLC