Guest “You get what you pay for” by David Middleton
Hat tip to Jan from the Netherlands…
It’s Too Late To Avoid A Major Oil Supply Crisis
By David Messler – Jun 17, 2021There are a number of observable trends in oil supplies and by extension prices, presently. I am going to discuss one of them in this article. A lack of capital investment in finding new supplies of oil and gas. A favorite analogy of mine comes to mind, the ship is nearing the dock. In nautical parlance that means the time for course corrections is at an end. So we shall see if that is the case for oil. The massive “ship” that is world oil demand is on an unalterable collision with supplies that will have profound implications for consumers. This key metric reveals what the future is likely to hold for our energy security as the world continues to recover from the virus to those who will listen. The level of drilling and by extension capital investment is insufficient and has been for a number of years to sustain oil production at current levels. It’s no secret that even with the lower break-even costs for new projects thanks to cost-cutting by the industry the last few years, oil extraction is a capital-intensive business. The chart below from WoodMac, an energy consultancy, shows just how severe the decline in capex has been.
The message to oil and gas companies has been pretty clear from the market, investment funds like Blackrock seeking green “purity” in the allocation of financing of new energy sources, and government edicts mandating carbon intensity reduction across the entire swath of society, and a transformation to renewable energy, that new supplies of oil and gas are not wanted.
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Oil Price Dot Com
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In fact, an article carried in the Wall Street Journal noted that “Planned investment in oil supply globally falls about $600 billion short of what will be needed to meet projected demand by 2030, according to JPMorgan Chase & Co. analyst Christyan Malek. Pressure to deliver cash to shareholders, partly driven by worries about the long-run outlook for oil demand, has limited the industry’s ability to plow money into new projects, he said.” This reasoning was seconded in the article by another analyst.
“It’s just hard to see where the capital is going to come from to grow at a rate that will be needed from 2022,” said David Meaney, founding principal of Assert Capital Management LP. The Dallas-based hedge fund is positioning for higher oil prices through futures and options.”
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To summarize. In an amazingly short period of time, the world has made an irreversible bet on green energy sources – solar, wind, and biofuels – being able to shoulder much of its energy burden. This is a transition without a track record and a very spotty roadmap of implementation. Time will tell if this bet will pay off. If my judgment is correct, we won’t have long to find out.
Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and office assignments. He currently maintains an independent training and consulting practice, and writes on energy related topics.
Oil Price Dot Com
While demand for motor fuels has nearly recovered to pre-Shamdemic levels…
Jet fuel has been a laggard. Some even asserted that air travel would not recover… Well, that appears to be changing:
Airfare bargains vanishing as airlines seize on surging summer demand
By JUSTIN BACHMAN AND MARY SCHLANGENSTEIN, BLOOMBERG NEWS
TRIBUNE NEWS SERVICE |
JUN 15, 2021The days of bargain basement airfares are ending as the U.S. vaccine supply unleashes a wave of pent-up travel demand.
A rebound in trips to visit friends and family coupled with flight schedules that remain below 2019 levels means more flyers chasing fewer seats. That’s pushing up trip costs for the peak summer season as carriers reboot revenue management tools — which raise fares in line with stronger seat demand — after a year in which planes often flew with rows of empty seats.
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Chicago Tribune
The Larry Finks of the world didn’t seem to factor supply and demand or the laws of physics into their “irreversible bet on green energy sources – solar, wind, and biofuels – being able to shoulder much of its energy burden.”
While it’s very annoying that these piss-ants think they can change the laws of physics by starving the oil & gas industry of capital, most of the industry is fine with lower CapEx and more free cash flow…
As Inflationary Pressures Mount, Impacts on Oil and Gas Production Could Intensify
BY KEVIN DOBBS
June 13, 2021
U.S. oil producers overall have been reluctant to ramp up output even as crude prices climb and demand rebounds. They have focused on generating cash flow and exercised patience as the economy recovers from the pandemic.But shortages of supplies needed for drilling and resulting inflation amid coronavirus fallout could extend the trend and keep production in check into 2022. Citigroup Inc. analysts said in a June report that inflation could eclipse 12% in the North American oil and gas sector by the end of 2021, driven up by rising costs for everything from steel to cement.
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All of this helps to explain why U.S. producers reiterated their caution when speaking with investors in recent weeks. Houston-based Marathon Oil Corp., for example, said in May it would hold firm to its $1 billion capital expenditures budget in 2021 even if oil prices keep rising.
“We will simply generate more free cash flow and further solidify our standing as an industry leader when it comes to capital discipline,” CEO Lee Tillman said during a call to discuss first quarter earnings, echoing several of his peers.
Assuming a $60/bbl West Texas Intermediate oil price, the independent expects to generate $1.6 billion of free cash flow this year, he said. Marathon has a mandate to return at least 30% of cash flow from operations to investors and is on track to return more than 40% in 2021.
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Natural Gas Intelligence
With some commodities traders betting on $100/bbl oil, this classic 1978 Saturday Night Live skit comes to mind:
A Special Message From the President of the United States
President Jimmy Carter…..Dan Aykroyd
[ open on Presidential seal ]
Announcer: And now, a special message from the President of the United States.[ dissolve to Oval Office ]
President Jimmy Carter: Good evening. On Tuesday, we Americans will have the opportunity to exercise our role as citizens in a free democracy. Yet, only a third of the eligible voters will actually cast ballots. The other two-thirds are, in a sense, very lucky. Because they do not know what’s going on.
Last week, I delivered a message on inflation. Since then, the dollar has dropped in value, the stock market has sustained record losses, and the whole sow price index increased 0.9%. In other words, our economic system is screwed, blued and tatooed! We just have to face the fact that there is simply no way to fight inflation in a capitolly-intensive, highly-technological, conflict-riddled, anything-for-a-thrill world of today. That’s why, tonight, I want you to try to look for in inflation, an entirely new word: Inflation is our friend.
For example, consider this: in the year 2000, if current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean – most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn’t you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would! But what about people on fixed incomes? They have always been the true victims of inflation. That’s why I will present to Congress the “Inflation Maintenance Program”, whereby the U.S. Treasury will make up anyinflation-caused losses to direct tax rebates to the public in cash. Then you may say, “Won’t that cost a lot of money? Won’t that increase the deficit?” Sure it will! But so what? We’ll just print more money! We have the papers, we have the mints.. I can just call up the Bureau of Engraving and say, “Hi! This is Jimmy. Roll out some of them twenties! Print up a couple thousand sheets of those Century Notes!” Sure, all these dollars will cause even more inflation, but who cares? Everyone will be a millionaire!
In my speech last week, I said that America would have to undergo an austerity program, but since this revolutionary new approach welcomes inflation, our economy will be free to grow, and we can spend, spend, spend! I believe the watchwords for the 80’s should be “Let’s Party!” And in that spirit, I’d like to say, “Live, from New York, it’s Saturday Night!”
SNL Transcripts
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Meanwhile, Russia is nearly finished building Nord Stream 2, and China, not to be outdone, is doing oil and gas exploration, apparently with some success:
https://www.rt.com/business/527091-china-major-oil-deposit-discovery/
You can’t always trust the veracity of RT (it is after all “state-sponsored”), but it’s still a better source of news than MSNBC, CNN, BBC, Guardian, nearly as good as Sky News Australia.
The tone of RT’s articles about China is becoming very cordial, and suggests new levels of cooperation and collaboration between them, e.g. this:
https://spacenews.com/china-russia-reveal-roadmap-for-international-moon-base/
“Ras” Putin is many things, but naive, ignorant and stupid are not among them. He can tell which way the wind is blowing.
“The world has made an irreversible decision on green energy”. The western democracies have made this decision. It will be out epitaph.
As we saw when the Saudis got mad at the Russians for not cooperating on the price-fixing scheme, there is plenty of spare capacity still. The Middle East prefers that they have it, and not the USA. if the price holds, companies will invest in tight gas and more difficult to extract oil. What worries the Saudis the most is viable nuclear (the greens will take care of that issue for most of the world) and Iran coming off sanctions.
Oil will be $100 / barrel by Labor day. Maybe.
Gonna be panic in the streets when the price does not stop there.
Regarding the project shortfall of oil extraction investment, the analysis seems to assume that the cost of oil extraction is unchanged from 2014. The rapid decline in investment from 2014 to 2016 reflects the impact of fracking, which significantly reduced the cost of petroleum production and pushed higher cost production out of the market. Future efficiency gains in exploration and production should be expected to further reduce capital demand. It might be instructive to compare global spending with global production to assess the decline in unit production cost.
A short-term price spike may materialize if demand ramps up faster than forecast, but the shorter cycle time for fracked onshore wells will shorten production response time.
You are dead wrong. The rapid decline in industry capital spending from 2014 to 2016 was a direct result of the collapse of petroleum prices from over $100/barrel in 2014 to ~$30/barrel in 2016.
See: https://fred.stlouisfed.org/graph/?g=ETpj
Capital spending correlates quite well with petroleum prices:
https://www.flickr.com/photos/eiagov/21086660863/in/photolist-y8mDCk-2kNaic8-KgBAdb-2ac9pCh-sEKdLY-2jwbHEU-DGCLyx-rRDdmd-vQsp48-2d7Z7eZ-YWXVZL-suAdu7-LntTCd-xVoX6R-G9AxG9-2eqeK99-LnnJKW-KJQYPv-2cywbNz-EFQKh6-2kpkob3-234nCJ3-DGCLxk-DNxGRA-LenyCg-CCmMSC-EVMTks-YpxtE2-D5hWid-G5YZRp-24hqKXt-2bdpKcw-zwD5hb-FEhDLd-UDh4m4-2initsy-GrzwYj-2inip8w-2kHYaB1-KNMNVj-2ibuFD5-BeCuEW-Fr7QjS-KiwDuy-D91Bka-CMsgbo-2khdhHR-H1QBg8-2ispJzj-zwHJDF
The collapse of petroleum prices from over $100/barrel in 2014 to ~$30/barrel in 2016 caused the decline in capital spending.
See: https://www.eia.gov/todayinenergy/detail.php?id=23072
In a fairly short period of time, we have made a considerable bet on the world’s green energy, such as solar energy, wind energy and biofuels. Some car manufacturers, such as Mazda, focus on the efficient use of green energy to reduce the use of oil. In addition, the timing of the car will tell us whether the bet will pay off.
aussie fuel prices are as high as if oil was 120+ a barrel right now
and with ZERO car manufacturing left were screwed when they stop making ICE cars in eu or usa
if they actually do
or we’ll be in great wall or indian knock off mercs vws etc;-/
Yeah we are back to the races with gasoline consumption, and frankly we are all very pleased. Life is getting back to normal. The big bump in demand will rise gas prices… yeah I get it. It’s the Memorial day to July 4th peak and everyone is on the road again. Love it. But I don’t buy the long term investment as a predictive window into a slackening of the oil supply. There is plenty of capital out there to turn the cash flow/oil valve on and off. Maybe there will be a air lock in the supply tube with post pandemic spike in demand and prices soar a little. And maybe the reduced spending is due to the pandemic. The reduced spending could also be a sign of long term oil over-supply projections as Natural Gas takes a bigger chunk of the pie, (NG turbines, pumping out electricity for electric cars. I don’t like electric cars. I see them as inefficient consumers of fossil fuel (grid generation is 17%, burning gas in my care is 47%), but the fact that electric cars are here and coming maybe having a long range impact on investment. It was only 13-14 months ago when oil prices hit negative numbers. The pandemic sent shock ways through the layers of cartels and collusion. So how much is the price of oil based on supply and demand in the short or long run and how much of it is politics of the day. Much of it is up to a Saudi Prince/King/OPEC and how secure America makes him feel.1974, insecure: Israel/Egypt war… Saudi worries as US is silent concerning their security issues and are angered, gasoline goes from 33 cents to $1.00 1991, massive US military presence in Saudi Arabia (and they are our best new friends) very secure, down from $2.45 to 77 cents by 1996, Obama comes into office soft pedaling Iran and it shoots from $2.65 to $4.24 Trump is silent on Kasogi and gas drops to $2.10. Obama’s form VP, Biden comes to office and it goes from $2.25 to $3.35. Tell me this is supply and demand! Never forget the Sunni/Shiite conflict and the politics of the day when talking about oil prices. Why not promote electric cars, which promotes the grid, and our massive indigenous natural gas supply right here in my home state of Pennsylvania. Natural gas the fossil fuel that is good for greenie gooses and grid ganders. LOL
Jeff, you are cherry picking to fit your narrative. When Biden took office (price @2.25 per your post) gas prices were still *down* from their pre-pandemic level as COVID-restrictions were still in place (IE demand was still below normal levels). As restrictions are lifted and more and more people get back to normal behaviors (IE as demand rises) it’s not surprising that prices would rise (not to mention gas prices are seasonal, In the US they normally rise between Jan and Jun as warmer weather leads to more driving). This same thing would have happened regardless of whether Biden’s residence is in DC or if it remained in Delaware. Gas prices right now are currently not too much more than they were this time in 2019 (the year before the pandemic screwed up everything) and even closer to what they were this time in 2018 (and still below their peak of several years before that).
(ETA this was in reply to Jeff, Must have hit the wrong reply button)
Also you say “it was only 13-14 months ago when oil prices hit negative numbers” without examining *why* that is so. First it was oil “futures” (the price of oil delivered in the future) that were negative. Think about why that was so. The country was in lock down (IE driving was curtailed, with mainly only essential workers on the roads, most everyone else was huddling in their homes not going anywhere) demand was *way* down. On top of that Russia and the Saudi’s were cranking up supply. There was literally more oil already on the market then needed and no one willing to pay for it as they didn’t need it.
If I’m a company that bought oil/gas expecting normal demand for this month, which doesn’t materialize (due to all of the above) and I’m not expecting the demand situation to improve all that much next month, how much oil/gas do you think I’m gonna order for next month when I already have most of my current months supply left over (and only have a limited storage capacity) and it will likely last me for that month and maybe the next as well? The answer is likely very little to none. You’d have to pay me to take more oil/gas next month because I don’t actually need it and don’t have much room to store it as the left over from this month will more than cover my needs for next month.
It was very much a classic supply/demand issue (huge supply, little to no demand) that drove those futures prices to the negatives.
“I never thought leopards would eat MY face,” sobs woman who voted for the Leopards Eating People’s Faces Party.
Has anyone done studies / surveys on the extent that capital investment is being held back because of the uncertainty in the construction permitting process? It used to be that when you had your permit, you had your permit and therefore every expectation that you’d be able to complete the project. In 2016 Obama proved everyone wrong about that, when he had the Army Corps of Engineers pull the Dakota Gas construction permits. Notice in your chart of capital investment how closely that coincides to the drop-off.
The willy-nilly cancellation of construction permits for political expediency was not mentioned in the article, but it froze a lot projects on the drafting table. Who dares to invest billions of dollars in a multi-year project when you no longer have any assurance that you’ll be allowed to complete it, and have to eat it all as ‘sunk costs’?
“the level of drilling and by extension capital investment is insufficient and has been for a number of years to sustain oil production at current levels.”
Just normal supply and demand, the market at work.
People only respond to pressure that is why we have to have crises to initiate change.
Will consider buying some oil shares, David
. Might be a good short or medium term strategy.