Crude oil prices rally to a four year high

Oil and gas exploration in the Permian Basin. ( Photo: Shutterstock )

Crude oil prices rallied to their highest point since the crash in 2014, with international benchmark Brent crude (QAX18) bringing $82.17/bbl and West Texas Intermediate (NYMEX: CLX18) going for $72.64/bbl at press time. The Brent-WTI spread, which measures the discount American oil enjoys against Brent—and therefore indicates how attractive American oil is to global buyers—widened to $9.52, a large spread but down slightly from a year-to-date high of $9.83 in June. 

Analysts from BofA Merrill Lynch (NYSE: BAC) said that Brent could reach $100/bbl this year, especially if Iran’s outages are worse than expected. At present, renewed American sanctions against Iran are expected to remove about 1M barrels per day from the global supply. The analysts said that if crude tops $100, there’s an increased likelihood of a volatile run-up and crash like the one we experienced five years ago.

The Baker-Hughes rig count (NYSE: GE) contracted slightly this week by two rigs to 1,053 rigs, helping firm up prices, but a closer look at the data shows the year-over-year transformation of the American oil industry and why it’s been so bullish for American trucking. Over the past year, the majority of the growth has been in horizontal oil wells: a year ago there were 790 horizontal wells in the United States; this week there were 919, an increase of 16.3%. 

Why are horizontal wells especially positive for truckload demand? Horizontal wells consume large amounts of sand and proppant chemicals, materials which are delivered to the sites by truck. Oilfield truckers have enjoyed important hours of service exemptions since the 1960s: a 24 hour restart period instead of the normal 34 hours, and the ability to classify their waiting time at oil sites as ‘off duty’ rather than ‘on duty’, which is how detention normally works. Still, the sheer growth in oil exploration and production in the past two years, especially in the Permian Basin, has strained trucking capacity as well as pipeline takeaway capacity.

Rystad Energy, an independent energy research firm, recently singled out Concho Resources as one of the top performers in the Permian Basin (NYSE: CXO): Concho’s horizontal wells have an average lateral length of 7,879 ft and a fairly low proppant intensity of 1,758 lbs per foot. That works out to an average of 13,849,524 pounds of proppant per well, which is just over 300 truckloads of sand per well. Rystad that Concho is achieving a below-average breakeven point of $36/bbl, demonstrating just how profitable the oil rally has become for efficient operators. Other E&P companies, such as Occidental Petroleum (NYSE: OXY) boast average lateral lengths exceeding 10,000 ft, requiring even more sand per well.

Earlier this month at TMW’s User Conference in Houston, Trimble (NASDAQ: TRMB) hosted an executives’ roundtable called ‘Understanding the unique needs of oil & gas services’. Leaders in the space talked about challenges that sounded like acute versions of the issues facing trucking as a whole: a shortage of drivers and everything that comes with it, including high rates and uncontrollable turnover. One owner of a trucking company who brings the initial materials and equipment to build the oil rigs themselves said that he has had to resort to paying drivers hourly wages and guaranteeing them 40 hours per week. Other trucking company owners lamented that because turnover was so severe, they’ve had to turn to owner-operators on the spot market to get their loads covered, and those trucks were often not equipped with the visibility technology oilfield operators need to keep wells flowing.

According to Bloomberg, traffic on Highway 302, which runs from Odessa to Loving County across the Permian Basin, jumped 76% in 2017; long delays from traffic jams caused by congestion and accidents are now common. Over the next two years, Texas plans to spend $610M upgrading the battered roads in the region. Exhausted drivers working 80-100 hours per week for annual salaries well in excess of $100K are dying in accidents at the rate of one every 35 hours.

Still, we can see the effect of oilfield on activity on trucking rates in DAT’s RateView tool. Over the past seven days, flatbeds from Houston to Lubbock averaged $2.37/mi net of fuel, which has softened from a high of $2.91/mi in June. Meanwhile, the New Orleans to Dallas lane is the highest it’s been all year for flatbedders, averaging $2.58 net of fuel over the past seven days. Houston to Dallas was one of the priciest lanes we found this morning, where flatbedders are taking an average of $2.77/mi over the past seven days, a rate that’s off its year-to-date high but trending upward from August’s average of $2.71 net of fuel. 


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John Paul Hampstead, Associate Editor

John Paul writes about current events and economics, especially politics, finance, and commodities, and holds a Ph.D. in English literature from the University of Michigan. In previous lives John Paul studied Shakespeare in London and Buddhism in India, but now he focuses on transportation and logistics in the heart of Freight Alley--Chattanooga. He spends his free time with his wife and daughter herding cats, collecting books, and walking alongside the Tennessee River.