Energy Sector

[Sweet]

1 hour ago, Spekulatius said:

XOP contains crappier companies than XLE so what I imagine happens is that in every downturn (2015, 2020) , some go bankrupt or in dilution hell, so the equity in those is toast. There is no recovery from your equity being toast and only partially from dilution at the bottom. That is why I imagine those ETF undercover m the underlying equity.
The other reason is that while equities follow directionally spot prices, its not (and should not be) a one to one correlation. Equities  should rationally trade based on LT cash flows, not on spot prices. LT cash flows depend on the prices in the future and the expect stunk for those are reflected in the crude future a few years out. Right now a quick loom shows that crude futures for Dec 2025 futures trades for ~$70/brl and that is why E&P companies are valued as if crude trades at around these values.

 

 

I have no view whether these assumptions are correct. If you do think these prices a will rise, you should think about trading specific crude futures rather than oil stocks, imo,

.

 

Agree it won’t be a 1:1 correlation.

 

If break even if $40 and WTI is $50 = $10 income per barrel.

 

If oil doubles and goes to $100 your income has increased by 500%.

Problem is oil stocks don’t reflect that change.

 

I believe historic correlations have broken down for oil and gas stocks because so many don’t want to buy them.

 

Should there be a shift in attitudes multiples could expand without any oil price increase.  Likewise share buybacks can do the same.

[Spekulatius]

7 hours ago, Sweet said:

 

Should there be a shift in attitudes multiples could expand without any oil price increase.  Likewise share buybacks can do the same.

Why would there be a shift in attitudes? The ESG folks are still growing and if you listen to the younger generation, they are not going to go back to the old days.

Some of the other investors like me don’t buy commodity stocks when the commodity is high, they have seen it all. Many don’t buy commodity stocks because they have been burned several times over. I don’t think there that many incremental buyers actually.

 

The only thing you can rely on are capital returns. In that respect, the miners like RIO, BHP seems to be ahead of the oil stocks here. You want to see a clear capital return framework with cash dividends, not buybacks. Buybacks are nonsense, because they only occur at high share prices when the companies are flush.

If you dont believe me, look at how many oil companies bought back stock in 2020, there are virtually none. Buybacks are always buy expensive, buy nothing when cheap. If companies would just concentrate on paying dividend per formula on excess cash flow, it would be way better for investors. Thats why I like PBR, despite the political issues. If SU and CNQ starts to do the same thing and just issues double digit yielding dividend per formula from their earnings (lets say 60% of their net earnings), I would be a whole lot more interested and put some in my tax deferred accounts.

 

Right now, there is virtually no oil stocks that provides a better distribution yield than my ORI holding for example.

[SharperDingaan]

To invest in oil is to 1) invest in the commodity cycle, and 2) in the efficiency of the operator. Accept the risk of being a price taker, and magnify it by the efficiency of operator. Control your risk, by knowing your players.

 

The reality is that price doesn't stay < USD 90/bbl unless demand materially craters more than supply. Supply is depleting every month, and global reserves are in net run-off. If price is to materially fall, actual recessions have to be far more severe than what is already baked in. GS at a forecast USD 140, is just calling the BS.

 

Producers do very at USD 60-70, amazing at 90-100, & 'effing awesome > 120. The reality is that a windfall tax on oil will be imposed, to fund energy price rebates - well before there is any meaningful increase in net production. 

 

SD

[Sweet]

1 hour ago, Spekulatius said:

Why would there be a shift in attitudes? The ESG folks are still growing and if you listen to the younger generation, they are not going to go back to the old days.

Some of the other investors like me don’t buy commodity stocks when the commodity is high, they have seen it all. Many don’t buy commodity stocks because they have been burned several times over. I don’t think there that many incremental buyers actually.

 

The only thing you can rely on are capital returns. In that respect, the miners like RIO, BHP seems to be ahead of the oil stocks here. You want to see a clear capital return framework with cash dividends, not buybacks. Buybacks are nonsense, because they only occur at high share prices when the companies are flush.

If you dont believe me, look at how many oil companies bought back stock in 2020, there are virtually none. Buybacks are always buy expensive, buy nothing when cheap. If companies would just concentrate on paying dividend per formula on excess cash flow, it would be way better for investors. Thats why I like PBR, despite the political issues. If SU and CNQ starts to do the same thing and just issues double digit yielding dividend per formula from their earnings (lets say 60% of their net earnings), I would be a whole lot more interested and put some in my tax deferred accounts.

 

Right now, there is virtually no oil stocks that provides a better distribution yield than my ORI holding for example.

I don’t think there will be a shift in attitude, I said should there be a shift in attitude.  I think some manager like Fink of Blackrock have a common sense approach to O&G so I still think it’s possible.

 

I would prefer buy backs at these levels for most companies.  Oil stocks are not expensive in a forward basis.  Companies really weren’t in a position to buy back shares in 2020.

 

I think the easy gains have been made in the sector, I would not open a position at these levels either but nor would I sell if you had a position.

 

 

Edited July 16, 2022 by Sweet

[StevieV]

9 hours ago, Spekulatius said:

XOP contains crappier companies than XLE

 

Doesn't change the 5-year that much.  As mentioned above, WTI + 109%;  XPO -9%; XLE +8%.

 

9 hours ago, Spekulatius said:

Equities  should rationally trade based on LT cash flows, not on spot prices.

 

I agree.  I was just responding to your iron ore chart that mentioned energy.  I believe your iron ore chart was spot.

 

I think the spot and equity divergence was most clear in 2020 actually.  Every oil company is a zero at $20 WTI, let alone negative WTI.  April 2, 2020, WTI was $25; up from $16 and on its way to -$36.  That's a zero for everyone.  Equities traded way down, but obviously and rationally the equities didn't all trade to zero.  

 

Quote

I have no view whether these assumptions are correct. If you do think these prices a will rise, you should think about trading specific crude futures rather than oil stocks, imo,

 

There are some nice things about trading oil directly, but I think there are also some big advantages to the equities themselves.  I'll take MEG.TO as an example.  Very roughly speaking, I think they do better than $1B in FCF/year at $70 WTI in '25 (tax pools exhausted) and pretty much eliminated debt by that time.  Today, their market cap is $5B.  WTI in USD.  Others in CAD.

 

Who knows what the market will think of oil stocks in '25, but MEG certainly would have the cashflow to do much better than a 0% return if oil drifts to $70 over the next 3 years and much better than +40% (98/70) if WTI stays at today's $98 rather than drifting down to the futures $70.

 

I think my MEG FCF estimate is reasonable, but I did it quickly and so certainly could have screwed it up.

[Spekulatius]

@StevieV I showed the iron ore chart just to show how closely correlated the direction of equity prices is with the underlying commodity. Its not because I think it should trade like this. Same seem is true for energy, to some extend, although I think there are more confounding factors.

 

I agree I have a myoptic view of these sectors. I have invested in energy and commodity stocks longer than many are alive here and have had more misses than hits. In particular l, I have lost money when I was wrong about the price or the underlying commodity almost EVERY SINGLE TIME.

I gave up on commodities in 2014 when oil prices started to decline and really haven’t done anything in this sector there since. This has nothing to do with ESG but more that I found it impossible to predict the direction of commodity prices and every time things looked certain it turned out that it wasn’t though.

 

People here thing that we cant add supply but I disagree. If prices stay high I think some stuff will happen that nobody here accounts for. Just to add one possibility, do you guys think that the US is the only location with shale deposits? Why would that be? Europe has shale deposits for sure, but they may wont use then am although I am not sure that countries like Poland etc may get to that point.

Argentina has a huge shale deposits (Vaca Muerta) that rivals the largest US deposits and is just about starting to get exploited . There are likely dozens of deposits like this that nobody knows yet about. These bulk of these countries doesn’t care much about ESG either. Then there is Venezuela which is coming back (even with the government morons in place) and if you have s change all of a sudden a fee million barrack of supply will come on in a relatively short period of timeframe.

 

I would go so far to say that one political decision in or about Venezuela could kill your oil bull thesis right there, because  think this country alone could lift as much oil than Russia potentially. that would be a disaster for prices most likely because Russia really hasn’t reduced their oil exports yet, just the destination has changed.

 

 

Edited July 16, 2022 by Spekulatius

[StevieV]

Spek,

 

I'm just trying to fill in some blanks and responding to a few things that catch my eye.  I'm not trying to carry the bull case.

 

I agree that the underlying commodity prices are a huge deal.  How could they not be?  There is

a massive difference in what an oil company makes if WTI averages 60-80-100 or 120 over the next 5 years.

 

I also agree that, at the least, it is very difficult to predict future oil prices.  Oil looked like it would be tight for the foreseeable future and then US shale production came in and changed that.  Even look at the very short term.  As you say, Russian hasn't yet reduced their oil exports.  That would have been a contrarian view just a couple months ago and Russian exports are a huge deal.

 

FWIW, I'm long a few Canadian oil stocks.  I think oil prices will average a high enough for the companies to do well and think the equity prices are sufficiently low to compensate for the risks.  Hopefully for me that's correct.

[LearningMachine]

2 hours ago, Spekulatius said:

@StevieV I showed the iron ore chart just to show how closely correlated the direction of equity prices is with the underlying commodity. Its not because I think it should trade like this. Same seem is true for energy, to some extend, although I think there are more confounding factors.

 

I agree I have a myoptic view of these sectors. I have invested in energy and commodity stocks longer than many are alive here and have had more misses than hits. In particular l, I have lost money when I was wrong about the price or the underlying commodity almost EVERY SINGLE TIME.

I gave up on commodities in 2014 when oil prices started to decline and really haven’t done anything in this sector there since. This has nothing to do with ESG but more that I found it impossible to predict the direction of commodity prices and every time things looked certain it turned out that it wasn’t though.

 

People here thing that we cant add supply but I disagree. If prices stay high I think some stuff will happen that nobody here accounts for. Just to add one possibility, do you guys think that the US is the only location with shale deposits? Why would that be? Europe has shale deposits for sure, but they may wont use then am although I am not sure that countries like Poland etc may get to that point.

Argentina has a huge shale deposits (Vaca Muerta) that rivals the largest US deposits and is just about starting to get exploited . There are likely dozens of deposits like this that nobody knows yet about. These bulk of these countries doesn’t care much about ESG either. Then there is Venezuela which is coming back (even with the government morons in place) and if you have s change all of a sudden a fee million barrack of supply will come on in a relatively short period of timeframe.

 

I would go so far to say that one political decision in or about Venezuela could kill your oil bull thesis right there, because  think this country alone could lift as much oil than Russia potentially. that would be a disaster for prices most likely because Russia really hasn’t reduced their oil exports yet, just the destination has changed.

 

 

 

Thanks @Spekulatius for sharing your experiences and bringing a cautionary perspective.  Really appreciate.  Please keep it coming.  You're right, once price is high, supply can start showing up. 

 

Buffett has also been burnt by it before.  He made a big bet on COP in 2008 at the previous peak in oil and gas prices, and then got burnt.  

 

As I have said before, I think Buffett is late to the oil party this time also, but this time, I think he is late because he got burnt before.  I think he has been thinking about this since inflationary 1970s, when oil stocks out-performed all sectors, and he has had his finger on the trigger for oil stocks since then.  He pulled the trigger in 2008, and got burnt.  Next time, even though he realized heavy inflation happening in 2020 and 2021, because he was burnt before, he kept his hand off the trigger, until he finally realized that this time inflation is really happening, and that it is getting baked in society's psyche.

 

I think Buffett realized that this time is really different from 2008.  In 2008, normal goods & services you buy in economy had not doubled in price, unlike this time.  The word "inflation" was not getting baked in society's daily vocabulary unlike this time.  "Inflation" is one of those words that the more it gets mentioned, the more self-fulfilling prophecy it becomes. See https://trends.google.com/trends/explore?date=all&geo=US&q=inflation .

 

Another thing to keep in mind this time is that FCF yield is so high at the new fair oil price (that just conserves buying power of OPEC-member countries), that you might be able to get your entire investment out in FCF before new oil supply shows up. 

Edited July 16, 2022 by LearningMachine

[SharperDingaan]

The thing is with commodities, that in the short-term, the only potential incremental supply is unused egress capacity in the pipeline, and inventory. Sure, shale can be drilled quickly, throughput raised, valves opened a little wider, etc - but if there's no more capacity in the pipe/rail, that production is stranded. 

 

The medium term is typically 9 months through 3 years - whatever it takes to build the incremental infrastructure, to move the additional throughput. Thing is, that today that incremental build often no longer makes the business case (NPV<0), as there is a very real probability the build will no longer be required within a few years (no revenue). That incremental build either does not happen, or is only on a much smaller scale than would otherwise have occurred. Stranded for longer.

 

Waving a magic wand, does not deliver additional supply today. And you need to delver at least an additional 5%+ just to offset the continuous field depletion - 10M bbl/day of demand, needs an additional 500K bbl/day of new production within 1 year - just to stay even, and it cannot be brought on line at the snap of a finger. This is what investors just don't get.

 

Keeps coming back to the GS USD 140/bbl forecast. The only questions are for long, and how big the difference will be between actual and forecast. 

 

SD

 

 

 

Edited July 17, 2022 by SharperDingaan

[Viking]

There was a lot of commentary in energy markets the last week or so that Biden’s trip to the Middle East would result in an increase in supply from Saudi Arabia. “Why else would he go if not to announce an increase in Middle East oil production?”

 

What did we actually learn? Oil supply from Saudi Arabia is indeed at/near capacity. Or Saudi Arabia is still pissed at Biden. Or some combination of the two. Pretty much nothing was said about oil during the trip (in public). Bottom line, no good news on the supply side of the equation for oil.

Edited July 17, 2022 by Viking

[Viking]

When valuing a company most investors focus on a company’s stock price. What has the trend been? What is expected in the future? EPS. PE. Market cap. 
 

Most investors to not spend a lot of time looking at the debt side of things. Debt tends to be pretty stable for most companies… it's kind of just there. Now if a company is taking on a great deal of debt, yes, that can be a red flag. Because too much debt can get a company into trouble when the lean times arrive. 

————-

Where am i going with this? What does any of this have to do with energy?

 

Energy companies (as a whole) are paying down their debt at what has to be an unprecedented pace for a sector in recent economic history. And its not like they were over leveraged when they started down this road about 6 quarters ago (some were; most were not). Lots of energy companies have plans to reduce total debt by as much as 60-70% - and most will have hit their targets by the end of 2022 or 1H 2023. 
 

As a result, for lots of energy companies Enterprise Value is driving closer to Market Cap. Energy companies are making enormous amounts of money. It has been going to pay down which in turn has been actually driving down Enterprise Value (assuming constant Market Cap). Bizarre. 
 

This is not a situation thar most investors are used to thinking about… i would appreciate hearing others thoughts on this topic.  
—————

Enterprise Value vs. Equity Value/Market Cap: What’s the Difference?

It's more than just the numbers. It's how they're used that counts.

- https://www.thebalance.com/enterprise-value-vs-equity-value-market-cap-5189488

 

The equity value, or market capitalization, of a company is one piece of the company’s enterprise value. Both measures are used to make investment decisions, but they provide different perspectives. Market cap estimates what a company’s outstanding common stock is worth. Enterprise value calculates all financial interests of the business, including those of debt holders and subsidiaries.

[Ulti]

G-20 financial stability board… some comments in energy and commodity/ traders

https://www.fsb.org/wp-content/uploads/P130722-1.pdf

[SharperDingaan]

EV can be calculated from either the asset or liability side of the Balance Sheet. The problem is that most calculate only from the liability side, don't really know how to use it, and assume that the current market price of the preferred and common stock is correct. Of course, it isn't .....

 

We typically derive the value of a company, via the Gordon formula. Divide the Gordon value by the projected earnings to get the P/E multiple. Bet on earnings 'misses', and/or a sentiment change in the P/E multiple. Momentum approach.

 

But what if you're an O/G company? Great rock, but lack the resources to develop it - therefore the rock is worth squat. Value of the rock - cash - debt - preferred shares divide by common share count gives a very low share value. But if I can drill the rock , prove up how much economic oil I have, and the area becomes 'popular'  .... the value of that rock becomes very high, which produces a high share value. Sure, the market price/share may be less than the EV price/share - but if you want my rock, you're giving me at least the EV price. EV approach.

 

OBE is one such company. Lots of very good rock, cash flooding in (from production) to produce it, and EV dividing over a very low share count. Then add to it that a dollar invested in new drilling, pays itself back in < 9 months. or less. EV torque.

 

SD

 

 

 

Edited July 18, 2022 by SharperDingaan

[Viking]

It will be interesting to see what Russia does on July 21. If they continue to ship gas they will allow Europe to better prepare for winter (build out storage). Russia may have maximum leverage now… cut off supplies today and Europe WILL be screwed when winter comes. 
—————

Exclusive-Russia's Gazprom declares force majeure on some gas supplies to Europe

- https://finance.yahoo.com/news/russias-gazprom-declares-force-majeure-121224916.html

 

LONDON (Reuters) -Russia's Gazprom has declared force majeure on gas supplies to Europe to at least one major customer, according to a letter from Gazprom that will add to European fears of fuel shortages.

 

Dated July 14 and seen by Reuters on Monday, the legal force of the letter is to shield Gazprom from compensation payments for disrupted supplies, but risks escalating tensions between Russia and the West over the invasion of Ukraine that Moscow calls a "special military operation".

 

The letter said Gazprom, which has a monopoly on Russian gas exports by pipeline, could not fulfil its supply obligations because of "extraordinary" circumstances…

 

The Nord Stream 1 pipeline is shut for annual maintenance, which is meant to be completed on July 21, but some of Gazprom's European customers are nervous supplies will not resume.

[Viking]

We KNOW world oil demand is going to grow by 1 to 1.5 million barrels per day over the next 5 years (probably 10). Where is the increase in supply going to come from. Only a MODEST amount will come from Saudi Arabia…
—————

Saudi Arabia Reveals Oil Production Capacity Limits

- https://oilprice.com/Energy/Crude-Oil/Saudi-Arabia-Reveals-Oil-Production-Capacity-Limits.html

 

Saudi Arabia, the world’s top crude oil exporter, will not have additional capacity to increase production above the 13 million barrels per day (bpd) it has pledged to have by 2027, Saudi Crown Prince Mohammed bin Salman told the leaders of the United States, the Gulf Cooperation Council (GCC) states, Jordan, Egypt, and Iraq at a summit this weekend.

 

“We also stress the importance of continuing to inject and encourage investments in fossil energy and its clean technologies over the next two decades to meet the growing global demand, with the importance of assuring investors that the policies adopted do not pose a threat to their investments to avoid their reluctance to invest and to ensure that no shortage of energy supply would affect the international economy,” Crown Prince Mohammed bin Salman said in his address.   

 

“The Kingdom will do its part in this regard, as it announced an increase in its production capacity to 13 million barrels per day, after which the Kingdom will not have any additional capacity to increase production,” he added, as carried by the Saudi Press Agency.

 

Last year, Saudi Arabia said it expects to have boosted its oil production capacity to 13 million bpd by 2027 from 12 million bpd now…

 

At the Jeddah summit, the Saudi crown prince also criticized the growing backlash against fossil fuels, saying that “The adoption of unrealistic policies to reduce emissions by excluding major sources of energy without taking into account the resulting impact of these policies on the social and economic pillars of sustainable development and global supply chains will lead in the coming years to unprecedented inflation, rise in energy prices, increase unemployment and exacerbate serious social and security problems, including an increase in poverty and famine and crime rates, extremism and terrorism.”  

 

[StevieV]

3 hours ago, SharperDingaan said:

EV can be calculated from either the asset or liability side of the Balance Sheet. The problem is that most calculate only from the liability side, don't really know how to use it, and assume that the current market price of the preferred and common stock is correct. Of course, it isn't .....

 

We typically derive the value of a company, via the Gordon formula. Divide the Gordon value by the projected earnings to get the P/E multiple. Bet on earnings 'misses', and/or a sentiment change in the P/E multiple. Momentum approach.

 

But what if you're an O/G company? Great rock, but lack the resources to develop it - therefore the rock is worth squat. Value of the rock - cash - debt - preferred shares divide by common share count gives a very low share value. But if I can drill the rock , prove up how much economic oil I have, and the area becomes 'popular'  .... the value of that rock becomes very high, which produces a high share value. Sure, the market price/share may be less than the EV price/share - but if you want my rock, you're giving me at least the EV price. EV approach.

 

OBE is one such company. Lots of very good rock, cash flooding in (from production) to produce it, and EV dividing over a very low share count. Then add to it that a dollar invested in new drilling, pays itself back in < 9 months. or less. EV torque.

 

SD

 

 

 

 

Come on SD.  It looks like you are trying to redefine Enterprise Value (EV).  EV has a defined and calculated value.  Essentially, Market cap + debt - cash.  The EV just is what it is.  Just like the market cap.  There is no "calculated from either the asset or liability side of the Balance Sheet".

 

Perhaps you meant intrinsic value.

 

 

 

[lessthaniv]

2 hours ago, Viking said:

We KNOW world oil demand is going to grow by 1 to 1.5 million barrels per day over the next 5 years (probably 10). Where is the increase in supply going to come from. Only a MODEST amount will come from Saudi Arabia…

[SharperDingaan]

Accounting Approach.

Using only the asset side; book value EV = Net Working Capital + Fixed Assets + Goodwill. Convert to the efficient market approach (as above in the thread), by substituting market value for book value as much as possible.

 

As goodwill will value at zero, and the assets at break-up price, this will throw off an approximation of the liquidation EV - or the minimum that you will have to pay to buy the enterprise. Deduct debt, preferred shares, and minority interest from this EV to arrive at the intrinsic value of the common shares.

 

Make your assets worth more (by developing them), or lower your debt, to raise the intrinsic value of your common. If that intrinsic value is higher than the current market cap, the common share price rises. If it doesn't ... buy all the shares you can  

 

Financial Modeling, 4th Edition, Simon Benninga, Chapter 2 Valuation Overview.

 

Heretical (to the market), but equally valid approach.

 

SD

 

 

Edited July 18, 2022 by SharperDingaan

[lessthaniv]

On 7/16/2022 at 5:09 AM, Spekulatius said:

 

Some of the other investors like me don’t buy commodity stocks when the commodity is high, they have seen it all. 

 

How do you determine when oil is high? Do you see it high at $100WTI?

[james22]

While sustainable investing continues to gain in popularity, economic theory suggests that if a large enough proportion of investors choose to favour companies with high sustainability ratings and avoid those with low sustainability ratings (sin businesses), the favoured company’s share prices will be elevated and the sin stock shares will be depressed. Specifically, in equilibrium, the screening out of certain assets based on investors’ tastes should lead to a return premium on the screened assets.

 

The result is that the favoured companies will have a lower cost of capital because they will trade at a higher price-to-earnings (P/E) ratio. The flip side of a lower cost of capital is a lower expected return to the providers of that capital (shareholders). And the sin companies will have a higher cost of capital because they will trade at a lower P/E ratio. The flip side of a company’s higher cost of capital is a higher expected return to the providers of that capital. The hypothesis is that the higher expected returns (a premium above the market’s required return) are required as compensation for the emotional cost of exposure to offensive companies. On the other hand, investors in companies with higher sustainability ratings are willing to accept the lower returns as the cost of expressing their values.

 

There is also a risk-based hypothesis for the sin premium. It is logical to hypothesise that companies that neglect to manage their ESG exposures could be subject to greater risk (that is, a wider range of potential outcomes) than their more ESG-focused counterparts. The hypothesis is that companies with high sustainability scores have better risk management and better compliance standards. The stronger controls lead to fewer extreme events such as environmental disasters, fraud, corruption and litigation (and their negative consequences). The result is a reduction in tail risk in high-scoring firms relative to lowest-scoring firms. The greater tail risk creates the sin premium. However, returns are not all that matters. Investors also care about risk and thus risk-adjusted returns.

 

The research, including the 2019 study Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance, has found that companies with high sustainability (environmental, social and governance) scores exhibit less risk, typically having above-average risk control and compliance standards across the company and within their supply chain management. Because of better risk-control standards, high ESG-rated companies suffer less frequently from severe incidents such as fraud, embezzlement, corruption or litigation cases that can seriously impact the value of the company and therefore the company’s stock price. And less frequent risk incidents ultimately lead to less stock-specific downside or tail risk in the company’s stock price.

 

https://www.evidenceinvestor.com/who-owns-tobacco-stocks/

[Spekulatius]

2 hours ago, lessthaniv said:

 

How do you determine when oil is high? Do you see it high at $100WTI?

I think you can determine that oil prices are high relative to historical prices as well as production costs. So yes, I consider them high.

[LearningMachine]

14 minutes ago, Spekulatius said:

I think you can determine that oil prices are high relative to historical prices as well as production costs. So yes, I consider them high.

 

How about if we determined it based on American goods & services a barrel of oil can buy?

 

• At $60 per barrel, pre-covid, Saudis & Emiratis studying in U.S. could buy about 10 subway sandwiches. 
• To buy the same 10 subway sandwiches with a barrel of oil today needs at least $120 price per barrel. 

Edited July 18, 2022 by LearningMachine

[Kupotea]

11 minutes ago, Spekulatius said:

I think you can determine that oil prices are high relative to historical prices as well as production costs. So yes, I consider them high.

Agreed but supply is only so elastic. With a current deficit and spare capacity almost fully tapped you get demand destruction as the balancing factor. 
 

You need a way to encourage supply growth in what many see as a sunset industry. If we do get a recession and oil prices collapse do we not just end up with a bigger gap coming out of the other side? If the economy muddles along how long does it take to fill the current deficit?

 

I think we continue to grind higher until the economy breaks or the investment community changes their minds on the need for higher capex. 

[Gregmal]

And in 2008 we had $100 oil.
 

People I think, tend to be too confident in what they think they know about oil and gas. I’ve noticed it even with the best analysts I’ve followed over many years. It’s why, outside of forecasting supply and demand, I happily admit I know virtually nothing about it. the biggest tailwind you have now, especially in Europe and Canada, is stupid politics. The US, that could all start changing in a few months.

[Spekulatius]

2 hours ago, Gregmal said:

And in 2008 we had $100 oil.
 

People I think, tend to be too confident in what they think they know about oil and gas. I’ve noticed it even with the best analysts I’ve followed over many years. It’s why, outside of forecasting supply and demand, I happily admit I know virtually nothing about it. the biggest tailwind you have now, especially in Europe and Canada, is stupid politics. The US, that could all start changing in a few months.

Actually oil went to $140 in 2008, but only for a New York’s minute. In the past every oil price spike has been followed by a recession : 1990, 2001, 2008 and now likely 2022 which resolved the issue.

The US only produces about 10% of the crude (and consumes about the same amount) so it wont solve the issue, at least not in a fee month, but likely not at all. Even if the US increases production by 10%, its just one percent of the total, which matters, but hardly looks like the solution.

 

The solution is demand destruction which is likely happening right now in third and second world countries. These countries have for the most part seen their currencies devalued by 20% or more against the USD, they are seeing a magnified impact of the energy cost surge and can much less afford it.

 

China right now looks like  they effectively are already in a recession right now and their construction  industry certainly is (a huge energy consumer) so I am guessing that demand is going to be reduced and we know that the price elasticity curve in crude is very steep, with obvious consequences for the clearing price.

 

I actually think another spike in crude prices to the $140/ brl range would accelerate what I think might happen as I expect some third wold countries blow a gasket so to speak like Sri Lanka.

 

 

Edited July 18, 2022 by Spekulatius