DALLAS — Amid all the pessimism surrounding the plunge in oil prices since mid-2014 and the havoc it has unleashed on the industry, there’s a sense of calm in the sprawling conference room just north of downtown Dallas.
I’m sitting next to the legendary Texas oilman T. Boone Pickens, who doesn’t seem worried at all.
Ask Pickens what’s going to happen with oil prices, and rattles off an optimistic scenario: The US rig count will drop to somewhere between 750 and 1,000 working rigs (currently, it’s at a five-year low of 1,192). Then, the market will balance off U.S. production and West Texas Intermediate crude will return to about $70 a barrel by year’s end.
In another year, oil will be selling for $80 to $90 a barrel.
I point out that almost no one else in the industry agrees. Pickens shoots me a sideways glance.
“We know what we’re talking about,” he says. “The only thing we’re not certain about is the timing.”
Timing has long been Pickens’ Achilles heel. Over the years, he’s made and lost several fortunes because of timing. In the 1980s, he was so certain that natural gas prices would rise, he bet the future of his entire company, Mesa, on it, switching from corporate structure to a partnership.
Then, when the price increases didn’t come as soon as he expected, he borrowed $1 billion to pay distributions to investors, leaving the partnership saddled with debt.
Gas prices did, eventually, rise, but not soon enough to keep Pickens from losing control of Mesa in the mid-1990s. Since then, he’s reinvented himself as an investor, leading a hedge fund group, BP Capital, which invests in commodities and energy equities.
He made another fortune, joining the Forbes list of the world’s billionaires in 2005. Now 86, he’s given away millions of dollars from his personal fortune, dropping off the Forbes list in 2013.
I came to Dallas because Pickens has seen more boom-bust cycles than most others in the oil business, and because he likes to play the role of contrarian. Amid all the doom and gloom, I wanted to hear the optimist view.
He invited me to sit in on the daily investment committee meeting, in which a handful of associates — most of them 50 years younger than Pickens — parse the day’s events and review the markets.
On this day, Israeli Prime Minister Benjamin Netanyahu made a speech to the US Congress criticizing President Barack Obama’s nuclear nonproliferation deal with Iran.
A deal has implications for oil because it would result in ending economic sanctions against Iran, which in turn would enable the country to sell more oil on the world market. Iran has indicated it may sell as much as 1 million barrels on the world market, adding to the oversupply that has already depressed oil prices globally.
Pickens is skeptical.
“I don’t think they can do it,” he says.
The Iranians haven’t had access to capital to invest in their oilfields, which makes it unlikely they can boost production, he explains. Nothing about the Iranian situation changes his long-term prediction about oil, but it could make markets more volatile in the short term.
But he’s convinced that it’s not a long-term issue, and that biggest factor is latent demand.
“This is not 1986,” Pickens says, referring to the bust that, like the current slump, grew from global oversupply. Demand simply hasn’t kept pace with surging production, primarily from the U.S., but Pickens believes that’s going to change.
The world needs the additional US supply from hydraulic fracturing, as he sees it, and it’s that supply that has kept prices relatively stable leading up to last summer.
“If you hadn’t the US, you’d have had $150 oil,” he says.
Now, he believes low commodity prices are setting up the next cycle.
Supply growth trailed demand growth until 2013, when rising U.S. production caught up with it. Demand was expected to keep rising, but instead it fell in 2014. As a result, production outpaced demand for the first time in more than five years, according to Pickens’ analysis.
This year, Pickens anticipates that demand growth will begin accelerating again, sopping up the excess supply. Meanwhile, he expects US supplies will begin falling in 2016 because much of the cheapest and most accessible shale reserves have already been drilled.
That means maintaining production levels will get more expensive in the years ahead. Adding to the mix, he believes the U.S. Federal Reserve will begin raising interest rates by mid-summer, which will make financing production more expensive.
Pickens knows first-hand the perils of trying to predict the oil markets, but he also has the benefit of perspective. His timing hasn’t always been perfect, but since set he set up his original commodity fund in 1986, he’s had only four down years.
That doesn’t mean he’s got it right this time, but it does explain why he remains so calm while the rest of the market worries that oil will keep dropping.
Loren Steffy is a managing director with the communications firm 30 Point Strategies. He is a writer at large for Texas Monthly, a contributor to Forbes and the author of Drowning in Oil: BP and the Reckless Pursuit of Profit and The Man Who Thought Like a Ship.