Rusty Braziel, president and principal energy markets consultant for RBN Energy and author of "The Domino Effect," a book about how the shale revolution has been transforming energy markets, is the most knowledgeable person I talk to about the state of the global oil markets.
I will share my latest conversation with Rusty Braziel with Real Money subscribers in Q&A form. Part 1 is below:
Cramer: How did you know that crude oil prices would stay lower for longer?
Braziel: Prices dropped because of oversupply. For the market to rebalance, either demand would have to increase or supply to decrease. Even with prices off 50%, we didn't think that demand could respond quickly enough to solve the problem. That leaves supply -- either U.S. producers would have to cut, or the Saudis would have to cut. We didn't think either was going to happen. So our view was that prices would stay under pressure.
Cramer: Why didn't you think that U.S. production would decline?
Braziel: We concluded that some producers would keep on drilling because they could make money, at least on a go forward basis, ignoring any sunk cost. They could do so because of smart hedging, creative cost reductions, and the fact that they were fortunate enough to have acreage in the very best spots where they could bring in wells with the highest initial production rates. Put all those factors together, and some producers in the best parts of the right basins are better off drilling than not drilling at prices below $50. And a few are good below $40. In 2015 there were enough producers in those situations to keep U.S. production basically flat.
Cramer: Why would the Saudis not step in?
Braziel: The Saudis are not going to save U.S. producers from themselves. Let's say the Saudis reduce their production. So, what's going to happen next? No doubt, prices would increase. But then what? Then U.S. producers would jump back in there, drilling would ramp up, and U.S. production would start growing again. And when that happens, prices drop right back down. So, the Saudis end up with less market share and low prices. Why would they do that? Of course, they wouldn't.