Energy Sector

[Viking]

1 hour ago, Eng12345 said:

Viking - any idea on how many barrel per day delta from current market conditions we would need to be at to reach $150 oil? 

@Eng12345 Great question. I am definitely not an expert on the oil market. So no, i do not have a precise or even good answer to your question. However, after doing a fair bit of reading on energy markets over the past 9 months my thesis is the oil market is exceptionally tight right now. So tight it will not take much to move oil prices in either direction. 

Global demand is about 100 million barrels per day. Global supply seems to be about 99 or 99.5 million barrels (small deficit). The deficit is being made up from drawing about 1 million barrels from SPR (combined with other countries also tapping reserves). OPEC excess capacity appears very limited (Saudi Arabia and UAE) and what little is left will likely not be used (it will be held for a true emergency… and $100 is not an emergency). 
 

So my view is the price of oil will be VERY volatile moving forward. Where the price goes from here will depend more than ever on short term events. My base case is oil averages something in the $90’s in 2H 2022. At this price oil companies will continue printing cash. I also think, given how tight the current market is, it would take very little to spike oil to $150. Of course oil companies would make insane money if that happened.
 

And i don’t think $150 oil is that high of a price. Oil traded over $100 for 5 or 6 straight years not that long ago. We managed just fine when that happened. House prices have doubled the past 5 or 6 years. Why not oil? Why is $200 such a crazy number (given the significant inflation we have seen in ALL other asset classes the past past decade). 
 

The current demand/supply set up is also much more bullish for oil than when it last traded over $100 (we were still heavily investing in supply back then). Bottom line, i like the risk / reward set up. My time horizon is looking out 3-6 months. My oil positions are not long term holds. I have no desire to become an oil bug. I subscribe to @SharperDingaan ‘s view that you rent not own commodity holdings. That advice has served my very well over the past year (with steel, lumber and more recently oil).

—————

Demand

- how much will global oil demand continue to grow as countries exit covid?

- where does the Chinese economy and oil demand there go from here? Will the zero covid policy ever end?

- how much substitution of nat gas/coal to oil happens in Europe this fall? 
 

Supply

- do we have an active hurricane season in Gulf of Mexico forcing oil wells offline?
- does US end SPR drawdown later in October as currently planned? That would cut 800,000 barrels from supply immediately.

- what happens to Russian supply moving forward? I see the risk here to the downside (not a big decrease… but a slow decline over years).

- what does Putin want? In a tight oil market one large producer has a lot of leverage in the short term. And Russia is one of the largest producers.

- do we get a deal with Iran? Even if we do how much incremental oil will actually be added to global supply (versus oil already coming to market from Iran via the black market).

- how much new supply comes from US? What does new supply from shale look like? Have we seen peak production from shale (or are we close)?

- does Venezuela ever come back on line? This is likely a medium term opportunity (not a near term fix).

- Saudi Arabia / US relations: i also think Biden’s/the Democrats very public call out of the Saudi crown prince over the Khashoggi killing is a big deal. Saudi Arabia is NOT looking to do the US and favours right now when it comes to the price of oil.

- Western governments are doubling down on current energy policies (that are resulting in less investment in oil production). 
- ESG is the new religion and is not going away (resulting in less investment in oil production). 
- do we get a surprise? Does Libya go back off line? Or some other surprise no one is anticipating? Oil is produced in lots of countries with unstable political/economic situations. There is always a problem somewhere… that is why OPEC excess supply has been so important in the past to keep pricing stable in the oil market. As i said in a previous post… the shock absorbers have been removed… the ride is about to get a whole lot bumpier! 

Edited August 14, 2022 by Viking

[Sweet]

Iran deal looks likely, my own view is Iran has been getting a lot more oil to the market than it lets on.  Still for sure some production will come back in the next 1-2 years plus they will be able to get the market price.

 

The cynic in me says that Iran agreeing to a deal may be related to Russian sanctions kicking in.  EU embargo on Russian oil is only a few months away, Russian oil may end up be exported from Iranian ports as ‘Iranian’ oil.

Edited August 15, 2022 by Sweet

[lessthaniv]

https://boereport.com/2022/08/16/column-appalling-new-historical-precedent-surplus-cash-flow-cannot-solve-worlds-energy-problems-by-design/

 

 

[james22]

Germany to Keep Last Three Nuclear-Power Plants Running in Policy U-Turn

 

BERLIN—Germany plans to postpone the closure of the country’s last three nuclear power plants as it braces for a possible shortage of energy this winter after Russia throttled gas supplies to the country, said German government officials.

 

While temporary, the move would mark the first departure from a policy initiated in the early 2000s to phase out nuclear energy in Germany and which had over time become enshrined in political consensus.

 

https://www.wsj.com/articles/germany-to-keep-last-three-nuclear-power-plants-running-in-policy-u-turn-11660661914?mod=hp_lead_pos4

[bizaro86]

1 hour ago, james22 said:

Germany to Keep Last Three Nuclear-Power Plants Running in Policy U-Turn

 

BERLIN—Germany plans to postpone the closure of the country’s last three nuclear power plants as it braces for a possible shortage of energy this winter after Russia throttled gas supplies to the country, said German government officials.

 

While temporary, the move would mark the first departure from a policy initiated in the early 2000s to phase out nuclear energy in Germany and which had over time become enshrined in political consensus.

 

https://www.wsj.com/articles/germany-to-keep-last-three-nuclear-power-plants-running-in-policy-u-turn-11660661914?mod=hp_lead_pos4

 

If we can stop doing new stupid things that will at least help alleviate the shortages somewhat...

[Ulti]

good article on shifting energy security and the next 10 years

https://warontherocks.com/2022/08/new-winners-new-losers-toward-a-new-energy-security/

[SharperDingaan]

Back in the day, today's 'transition point' was referred to as 'peak oil'. Only real difference is than In the current 're-brand', the focus is more on the tier-2 changes resulting from the tier-1 decline in overall production. 

 

Nobody likes large scale change, and ESG bears the brunt of the fear/frustration.

However, the reality is that ESG is poorly understood, and still very early in its evolving roll out. Ultimately, ESG is about achieving globally sustainable business; the various carbon, plastic, health charges; and standardized triple bottom line financial reporting, are just vehicles by which to get there. 

 

Sustainability is simply net consumption equal to net contribution from recycle, reuse, repurpose. Net oil used coming from recycling, and not as virgin oil pulled out of the ground. Mindset thing.

 

SD

[james22]

3 minutes ago, SharperDingaan said:

However, the reality is that ESG is poorly understood...

 

Not really:

 

3 minutes ago, SharperDingaan said:

Ultimately, ESG is about achieving global socialism.

 

Corrected for you.

 

Advocates of ESG delivering superior investment performance (“risk/return ESG”) must assume that the stock market doesn’t behave as modern finance theory suggests it will. 

 

https://www.realclearpolitics.com/docs/2021/rupert_darwall_capitalism_socialism_and_esg_may_2021.pdf

 

We show that there is no solid evidence supporting recent claims that ESG strategies generate outperformance. 

 

https://cdn.ihsmarkit.com/www/pdf/0521/Honey-I-Shrunk-the-ESG-Alpha.pdf

 

Many ESG Funds Are Just Expensive S&P 500 Indexers

 

https://www.bloomberg.com/opinion/articles/2021-05-07/many-esg-funds-are-just-expensive-s-p-500-indexers

[nafregnum]

Around July 21-23 The Economist ran some articles and podcast episodes critical of ESG in its current form.  

 

(Special Report: A broken idea.  ESG Investing)

https://www.economist.com/special-report/2022-07-23

 

(Economist Money Talks podcast, July 20, 2022 - The backlash against ESG)

https://overcast.fm/+JXrTTNtN0/0:35

 

A good quote:

"E. and S. and G. independently, all have their merits.  Where it goes wrong is when they're put together into one ugly acronym."

 

Personally, I do care about all three letters.  The problem is: you can't boil down measurements on all three of these domains and come up with a meaningful single score...  I worry that ESG funds might be selling the feeling of moral purity and righteousness without really doing a whole lot -- which is a problem because (a) people who care may be lulled into a false sense of security/virtue, and (b) the vilification of O&G is leading to a kind of chronic undersupply.

 

John Curtis (Republican US representative) has some great thoughts about the bigger picture -- he says U.S. natural gas burns 40% cleaner than Russian natural gas.  The USA represents 14% of worldwide emissions.  So even if USA got to zero, it wouldn't mean a whole lot on its own.  If NG from North America is so much cleaner, and if it's more responsibly sourced (less methane leaks, more oversight, etc) then why wouldn't the USA want to celebrate its NG industry?

 

There's just a lot of confusion in the thinking as we humans muddle our way toward a greener future.

 

At a dinner in Scotland, the president of Scottish Power told him that they're 100% renewable, because they have so much wind that they can power the whole country with wind.  Curtis asked him innocently: "What do you do when the wind doesn't blow?"  And he said, "Oh, that's easy.  We import Russian NG when the wind doesn't blow."  Two minutes later he looks at Curtis and says "We are 100% renewable."  having not made the connection that they were still very dependent on natural gas.  ... 

 

 

One more example of confused thinking:

 

https://www.inputmag.com/tech/gmc-hummer-ev-carbon-dioxide-emissions-electric-truck

 

I'm sure there'll be plenty of EV Hummer owners with virtue signaling vanity plates, despite the fact that they're dirtier than ICE sedans (charging that huge battery with power from the U.S. grid causes more emissions than a gas engine sedan emits.)  

 

[james22]

Last week, California governor Gavin Newsom announced a plan to roll back the planned retirement of Diablo Canyon, the state’s only surviving nuclear power plant. For several months, Newsom had been tentatively exploring options to keep the San Luis Obispo plant running. Nonetheless, the announcement was something of a shock. After all, not so long ago, the governor had helped lead the political movement demanding that the plant be closed. And until quite recently, California’s elite class—lawmakers, journalists, entertainers—were almost unanimously opposed to the very idea of nuclear power, seeing it as a risky and unnecessary distraction on the road to bounteous wind and solar power.

 

https://www.city-journal.org/how-grassroots-activism-saved-diablo-canyon-nuclear-plant

[nafregnum]

Currently my biggest bet is on the energy sector, mostly O&G producers in Canada... 

 

It's not really the way I typically invest, which is to buy things I'd be comfortable owning for five to ten years.  

 

I find myself watching this thread and reading articles about the oil market on a daily basis.  As concentrated as I am right now, and knowing I probably won't be holding these O&G companies for five to ten years, I feel like watching my thesis like a hawk.

 

It's been really helpful to get input from the skeptics as well as the optimists.

 

I'm starting to worry about strange notions -- like trying to guess the incentives of major players like the National Oil Companies.  For example, it seems like oil moves up or down just on the hint of fluctuation in supply or demand, so with a high oil price there's an incentive to increase production and capture a little more while it's extra profitable.  But there's also the incentive (I imagine) to keep your capacity/production gains a secret in order to keep prices higher for longer.  Could Aramco or other NOCs or other players in the market be doing this and keeping mum about it?

 

Are there other strange risks that worry you?

 

[nafregnum]

9 minutes ago, james22 said:

https://www.city-journal.org/how-grassroots-activism-saved-diablo-canyon-nuclear-plant

 

Hey, wow, that's some hopeful news!

 

This sentiment from the LA Times editorial quoted in the article:

 

--snip--

There are “better ways to fight climate change,” a Los Angeles Times editorial sniffed. Any hardships imposed by closing the plant should “serve as an impetus for California to accelerate the shift to renewable energy.” 

--end snip--

 

That sounds like what my brother said last week after I described why oil prices are high and likely to remain high.  "Well, maybe oil should be expensive so we work harder to get away from it."  In other words, instead of considering that the green agenda may need to participate with reality in the solution, it's somehow more noble for everyone to suffer through high prices?

 

... I'm not too sure that kind of "green masochism" will get us far.  It's more likely to stoke consumer anger.  Maybe Newsom saw that writing on the wall.

[james22]

BRK just approved to buy 50% of OXY.

 

Should encourage the optimists.

 

 

[Kupotea]

I think the best energy play is coal producers at the moment. You have companies like BTU trading in the range of 1x EV/EBITDA based on next year’s strip. Obviously coal will be phased out of western economies within the next decade but I just don’t see the developing world moving away from the cheapest source of available base-load electricity. As long as coal is cheaper than natural gas I expect increasing demand from India, China, etc. All the supply side constraints applicable to oil/gas (lack of available financing, lack of certainty for future demand, etc.) are even stronger for coal.

[SharperDingaan]

Quick comments on ESG.

 

ESG does not come out of the box 'fully formed', it is an evolving process.

Like it or not there will be carbon trading, plastics trading (disposables), and garbage trading (high vs low emission). Reason being that putting a price on pollution supports the business case for an investment in new equipment that removes carbon, plastics, high emissions garbage, etc. We will simply be paying the full cost of what we consume, which includes the pollution in its production/disposal.

 

It means fundamental change for most industries, and recognition that not everyone sees ESG the same way.

A long-short of ESG darlings vs ESG pariahs isn't going to outperform, simply because the ESG impact is not yet visible. Investors are not going to penalize an Exxon/BP/Shell until there is a line on the P&L recording carbon tax paid in the quarter; that can be compared against the total cost of SG&A. SG&A is wholly under company control, as is the carbon tax ... so when that carbon tax is perceived to be too high relative to SG&A ?? THAT's the time to be doing the long-short trade.

 

The investment value of ESG, is primarily in the new industries it creates.

Green industries would not exist unless there was a tax on carbon, plastic, and emissions. Everything from windmills, EV vehicles, recyclable plastic, agricultural energy co-generation, urban solar panels ... the list is endless. Piddling around in the 20% of change in existing industries, versus the 80% in new/growing industries, misses the point.

 

Nobody likes change, hence all the vitriol.

But if you're a young person, ESG is a your sustainable future, it is quite obvious, and you have been doing the 3 R's since you were born - to them, WTF is the problem! Old geezers who refuse to change 

 

All we have is direction, there is no playbook, and uncertainty is the norm.

Everyday real world living does not come with guarantees.

 

SD  

 

Edited August 21, 2022 by SharperDingaan

[Eng12345]

On 8/14/2022 at 1:01 PM, Viking said:

@Eng12345 Great question. I am definitely not an expert on the oil market. So no, i do not have a precise or even good answer to your question. However, after doing a fair bit of reading on energy markets over the past 9 months my thesis is the oil market is exceptionally tight right now. So tight it will not take much to move oil prices in either direction. 

Global demand is about 100 million barrels per day. Global supply seems to be about 99 or 99.5 million barrels (small deficit). The deficit is being made up from drawing about 1 million barrels from SPR (combined with other countries also tapping reserves). OPEC excess capacity appears very limited (Saudi Arabia and UAE) and what little is left will likely not be used (it will be held for a true emergency… and $100 is not an emergency). 
 

So my view is the price of oil will be VERY volatile moving forward. Where the price goes from here will depend more than ever on short term events. My base case is oil averages something in the $90’s in 2H 2022. At this price oil companies will continue printing cash. I also think, given how tight the current market is, it would take very little to spike oil to $150. Of course oil companies would make insane money if that happened.
 

And i don’t think $150 oil is that high of a price. Oil traded over $100 for 5 or 6 straight years not that long ago. We managed just fine when that happened. House prices have doubled the past 5 or 6 years. Why not oil? Why is $200 such a crazy number (given the significant inflation we have seen in ALL other asset classes the past past decade). 
 

The current demand/supply set up is also much more bullish for oil than when it last traded over $100 (we were still heavily investing in supply back then). Bottom line, i like the risk / reward set up. My time horizon is looking out 3-6 months. My oil positions are not long term holds. I have no desire to become an oil bug. I subscribe to @SharperDingaan ‘s view that you rent not own commodity holdings. That advice has served my very well over the past year (with steel, lumber and more recently oil).

—————

Demand

- how much will global oil demand continue to grow as countries exit covid?

Not only exit covid but just natural growth. There is nothing out there suggesting we've hit peak oil, yet investments in new supply are few and far between world wide. 

- where does the Chinese economy and oil demand there go from here? Will the zero covid policy ever end?

- how much substitution of nat gas/coal to oil happens in Europe this fall? 
 

Supply

- do we have an active hurricane season in Gulf of Mexico forcing oil wells offline?

Or any other black swan event
- does US end SPR drawdown later in October as currently planned? That would cut 800,000 barrels from supply immediately. Ultimately SPR drawdown will have to end. This is me guesstimating but it seems to me the end of the SPR drawdown is timed to keep prices somewhat subdued until the election with the hope of bringing other supplies online in the meantime...however it doesn't seem to me that the Biden admin has been successful in negotiating/bringing other supplies online...

- what happens to Russian supply moving forward? I see the risk here to the downside (not a big decrease… but a slow decline over years).

- what does Putin want? In a tight oil market one large producer has a lot of leverage in the short term. And Russia is one of the largest producers.

Ultimately the oil/energy thesis is all about the russians at this point.

- do we get a deal with Iran? Even if we do how much incremental oil will actually be added to global supply (versus oil already coming to market from Iran via the black market).

- how much new supply comes from US? What does new supply from shale look like? Have we seen peak production from shale (or are we close)?

- does Venezuela ever come back on line? This is likely a medium term opportunity (not a near term fix).

- Saudi Arabia / US relations: i also think Biden’s/the Democrats very public call out of the Saudi crown prince over the Khashoggi killing is a big deal. Saudi Arabia is NOT looking to do the US and favours right now when it comes to the price of oil.

President Biden made a visit to the Kingdom and came away with a mere 100k bpd increase...

- Western governments are doubling down on current energy policies (that are resulting in less investment in oil production). 
- ESG is the new religion and is not going away (resulting in less investment in oil production). 
- do we get a surprise? Does Libya go back off line? Or some other surprise no one is anticipating? Oil is produced in lots of countries with unstable political/economic situations. There is always a problem somewhere… that is why OPEC excess supply has been so important in the past to keep pricing stable in the oil market. As i said in a previous post… the shock absorbers have been removed… the ride is about to get a whole lot bumpier! 

I agree with your general thesis... ultimately I think we keep oil prices bottomed in this range of $80-90 for longer than is expected - regardless of recession risk or other. The big thing for me seems to be the big russian question. 

 

That said if I see my oil stocks starting to make significant capex investments I will be out fast...

Edited August 20, 2022 by Eng12345

[jfan]

Highly recommend Daniel Yergin's recent book "The New Map".

 

Too much material to summarize here but very comprehensive work on the nexus of geopolitics/security/economics with current and future forms of energy. He discusses the interplay between the 2 and how they shape each other. He gives me an impression of a balanced view of all sides. The big take home message is that oil is not going away yet (and unlikely to do so) and the transition will take many decades with lots of challenges. 

 

Interestingly, Canada only gets a passing mention about how the oil sands are competitive wrt to GHG emissions in North America and globally. Doesn't appear that Canada has much volatile geopolitics that shape the world or the oil/gas industry to write about.

 

** listened to the audiobook. Tried reading his book, The Prize, years ago, just too dense for my simpleton brain.

[pcech]

30 minutes ago, jfan said:

Highly recommend Daniel Yergin's recent book "The New Map".

 

Too much material to summarize here but very comprehensive work on the nexus of geopolitics/security/economics with current and future forms of energy. He discusses the interplay between the 2 and how they shape each other. He gives me an impression of a balanced view of all sides. The big take home message is that oil is not going away yet (and unlikely to do so) and the transition will take many decades with lots of challenges. 

 

Interestingly, Canada only gets a passing mention about how the oil sands are competitive wrt to GHG emissions in North America and globally. Doesn't appear that Canada has much volatile geopolitics that shape the world or the oil/gas industry to write about.

 

** listened to the audiobook. Tried reading his book, The Prize, years ago, just too dense for my simpleton brain.

I like such kind of books and would like to read this one. However, I often find such books to be a bit disappointing, since it often seems that the goal is not to objectively inform about facts, but to push a hidden agenda.

Did you have an impression that it is pro-west and anti-China & anti-Russia?

[james22]

German Economy Minister Robert Habeck ruled out on Sunday extending the lifespan of the country’s three remaining nuclear power plants in order to save gas, saying it would save at most 2 percent of gas use.

 

These savings were not sufficient to be worth reopening the debate about the exit from nuclear energy given the consensus on the topic, he said during a discussion with citizens at the government’s open-door day.

 

Former Chancellor Angela Merkel initiated legislation to halt the use of nuclear power by the end of this year after the Fukushima nuclear disaster of 2011 with a majority of voters in favour. But attitudes are shifting amid fears of an energy crisis this winter following a decline in Russian gas deliveries – with the three-way coalition itself divided on the matter. 

 

“It is the wrong decision given the little we would save,” said Habeck, a member of the Greens party, which has it roots in the anti-nuclear movement of the 1970s and 80s.

 

https://www.reuters.com/business/energy/german-minister-rules-out-keeping-nuclear-plants-running-save-gas-2022-08-21/

 

LOL

[maxthetrade]

They guy is a complete idiot. Voters will get what they deserve. 

[Sweet]

6 hours ago, pcech said:

Did you have an impression that it is pro-west and anti-China & anti-Russia?

That would be a bad thing?

[scorpioncapital]

 

I have read that Fukushima was not such a bad disaster. I mean a few people died just being evacuated.

And Wikipedia writes, "

1 confirmed cancer death attributed to radiation exposure by the government for the purpose of compensation"

And that was due to a pretty rare tsunami! These new reactors are nothing like the stereotype we have of Chernobyl.

It is highly unlikely to have major safety issues so the German position is not rational.

[jfan]

12 hours ago, pcech said:

I like such kind of books and would like to read this one. However, I often find such books to be a bit disappointing, since it often seems that the goal is not to objectively inform about facts, but to push a hidden agenda.

Did you have an impression that it is pro-west and anti-China & anti-Russia?

No, I didn't get that sense. He didn't come across judgmental. He tried to explain each country's rationale for making the moves they did. Reasons spanned from geopolitical ambitions, unresolved social conflicts, economic wealth creation, and energy security. 

[SharperDingaan]

14 hours ago, scorpioncapital said:

 

I have read that Fukushima was not such a bad disaster. I mean a few people died just being evacuated.

And Wikipedia writes, "

1 confirmed cancer death attributed to radiation exposure by the government for the purpose of compensation"

And that was due to a pretty rare tsunami! These new reactors are nothing like the stereotype we have of Chernobyl.

It is highly unlikely to have major safety issues so the German position is not rational.

 

It was a disaster - loss of life was minimal because the source was quickly contained, and the fallout well managed. Had the same thing occurred in the US, most would have expected a poorer fallout management, and data manipulation attributing death by radiation, 5 yrs after the event, to 'natural causes'.

 

Nukes have evolved quite a bit, and are safely used in quite a few applications (shipping, etc.). Nothing wrong with using them, but its a very dumb idea to place them in  big cities - or let cities expand around them. High death count x low probability, still adds up to a lot of people - and the bigger the surrounding city, the higher the death count.

 

SD

 

[pcech]

17 hours ago, Sweet said:

That would be a bad thing?

Yes. I do not want to go into deep ideological discussions, but simply, I do not support the view that there is just black & white and books claiming so are not worth reading in my opinion.