Energy Sector

[Sweet]

They def aren’t all paper but it’s telling how bad market sentiment is that the cuts were extended a year and it just yawns.  Saudis should do the opposite - demand is so strong they have to lift supply… because what they are doing now is not working.

[JRM]

This is funny: https://seekingalpha.com/news/3978395-goldman-sachs-mlp-and-energy-renaissance-fund-to-be-liquidated

[Mephistopheles]

https://oilprice.com/Geopolitics/Middle-East/Irans-Booming-Oil-Industry-Adds-Urgency-To-Nuclear-Negotiations.html

 

To the experts on this forum, what are your thoughts on a potential black swan for oil prices if Iranian and Venezuelen production massively ramps up? Both countries are underproducing vs. their potential but both are ramping up production.

[Sweet]

By no means an expert.

 

Iranian oil is already back on the mark on the market to a large degree.  US shale is producing a lot of light oil that isn’t classified as crude, it’s likely being blending into oil.  Russian production has not been dropping much, they found a new home for their oil.  Venezuela is the wild card for me, no idea what happens there.

 

I think the recent news show that it’s not really demand that’s causing softened sun price but once again too much supply.

[Spekulatius]

The Saudis cut and the Russian flood:

https://seekingalpha.com/news/3983473-russia-poised-to-surpass-saudi-arabia-as-chinas-top-oil-supplier

[Viking]

7 hours ago, Spekulatius said:

The Saudis cut and the Russian flood:

https://seekingalpha.com/news/3983473-russia-poised-to-surpass-saudi-arabia-as-chinas-top-oil-supplier

@Spekulatius you certainly have been correct with your scepticism over the last year of how sustainable higher prices were. Note taken. Looks like demand from China is lower than expected. And supply from Russia and rest of world is higher than expected. We will see if demand picks up 2H.
 

Energy is still a core holding for me, although a smaller position than it was a few months ago. Suncor continues to be my largest position. I was adding Baytex (small amount) the last couple of days… lots of selling last week by US holders after Ranger close… stock got killed. 
 

I do like listening to Arjun Murti (depth to what he has to say, with focus on return on capital); Eric Nuttall can be fast forwarded, especially if you have heard him talk before. Bottom line, lots of oil companies are still very profitable even at $70 oil. Arjun actually likes low oil prices… he thinks that could extend the high margins/returns for longer. We will see.
 

 

Edited June 28, 2023 by Viking

[Spekulatius]

@Viking I think there was a lot of confusion about what the sanctions and the Ukraine war would or would not do. It has disrupted NG flows to Europe, but has not affected crude supply and demand balance that much. Europe was able to replace the lost NG supply from Russia for the most part, to the surprise of many.

 

I like energy plays with large cash distributions. I hold PBR-A (medium sized) and have a small position SU (bought recently ). Both are mostly dividend plays for me and great for tax deferred accounts.

[lnofeisone]

Europe got bailed out by warm (record-setting) weather in Europe and Asia. Couple that with energy-saving measures, and they ended up with a glut. It did force them to replace the supply. I would prefer prices to stay in the range of here to + 25% (so figure crude around $90). Low prices will result in WFT falling off by Dec 31 2023 in most places. 

 

I also hope certain companies with European exposure (looking at your VET) got more thoughtful about how they approach hedging (specifically, what jurisdiction). 

[Spekulatius]

13 hours ago, lnofeisone said:

Europe got bailed out by warm (record-setting) weather in Europe and Asia. Couple that with energy-saving measures, and they ended up with a glut. It did force them to replace the supply. I would prefer prices to stay in the range of here to + 25% (so figure crude around $90). Low prices will result in WFT falling off by Dec 31 2023 in most places. 

 

I also hope certain companies with European exposure (looking at your VET) got more thoughtful about how they approach hedging (specifically, what jurisdiction). 

This is incorrect. Europe brought a ton of alternative supplies to their market in a very short timeframe. Of course the milder winter helped as well.

[lnofeisone]

2 hours ago, Spekulatius said:

This is incorrect. Europe brought a ton of alternative supplies to their market in a very short timeframe. Of course the milder winter helped as well.

This isn't an argument that will make us money but for historical context: Europe did an amazing work bringing in LNG import facilities online however, Russia cut supplies by about 60% in June and stopped really providing gas around Sept of 2022 (due to "maintenance"). They basically filled storage while EU was bringing up supply capacity online with a bunch of FSRUs going up late summer, early fall. Absent Russian gas and mild weather, EU would not have enough time to pump out all the tankers to fill the storage sufficiently and keep up with an average cold winter. For example, EU uses up roughly 40 bcm/month during winter but their LNG import capacity is roughly 15 bcm/month. 

 

I look at this as two different EU regimes - pre-war and post-war.

 

Pre-war - stable supply, generally stable price

Post-war - generally stable supply, wild price swings

 

On the second point, Europe today is looking to import more LNG than China or Japan (two largest Asian consumers). They are coming in and basically aiming for a 20% of the total LNG market. The price dislocations here are going to be wild. If Russian supplies don't come back to EU, this winter is going to be very telling and the price-action for LNG in the spring/summer will be a good primer going forward. 

[kab60]

I think Canadian producers look quiet interesting still. My largest holding is $IPCO, which is down around 30-35% this year, but realized prizes oil prices aren't all that different from Q4 '22. While oil prices have dropped, so has the differential between WCS and WTI, and the Transmountain Expansion opens in Q1 '24 which all else equal should be positive for the differential as well. I'm licking my wounds from Harbour Energy PLC, where I definitely got the European gas situation wrong (at least in the short term).

[Sweet]

Sold all my energy positions yesterday, it was a good ride but for the first time in 7 years I haven’t a dime in O&G.  I first entered in 2016 and after initially doing well the position did nothing for 2 years and even dropped below my entry.  Covid came along and I allocated 100% of my port to energy around April / May 2020 and sold out over time.

 

I would have preferred to exit everything last summer but nobody can pick tops.

 

I see some room for energy prices to run, 50% upside maybe for some companies if they do well, but the apathy for the sector is extreme and the easy gains are over.  There are also so many dog shit companies run by piss artist managers.  Management matters so much in this space in terms of balance sheet management, and ironically management can also do nothing when all the shale idiots are pumping like mad.

 

Demand is strong but I don't buy the narrative of a super cycle driven by a lack of supply being imminent.  And as Biden showed, there is enough SPR around the world to push down prices.

 

Of course, I will buy into energy again if the bottom falls out the market I just don't see that happening short of a price war.

 

As someone said in this thread a while ago, you rent O&G stocks, you should rarely if ever own them.

 

Edited July 1, 2023 by Sweet

[SharperDingaan]

10 hours ago, Sweet said:

As someone said in this thread a while ago, you rent O&G stocks, you should rarely if ever own them.

 

We have also put on a roll or two over the last little while  Simply because a great many very good o/g companies in the WCSB have been severely sold down to ridiculous levels, and Alberta's recent election has added to the round-trip opportunities.

 

Renting vs owning is about controlling risk; the expectation is that the underlying is rising long-term, and you are trading the price volatility of the underlying price rise not being linear. The share count is kept the same, and the gains pushed into treasuries. Done well; there is a new cash inflow, and the unrealized loss becomes less volatile. End of the day you're still long the thesis, but at time-to-time are neutral (50% long, 50% round-trip); keep tabs on the macro for your local sector, and rebalance seasonally. 

 

SD      

Edited July 1, 2023 by SharperDingaan

[SharperDingaan]

Lot of tankers sitting in places where they shouldn't be. Have to think the Chinese were pissed, OPEC has agreed to made them whole in some fashion; and that a whole lot of adulterated Russian and Iranian crude is about to be dumped on the market. Russia's recent 500K bbl/day cut back is roughly 15M bbl/month ... not far off the current floating capacity anchored off Egypt.

 

https://oilprice.com/Latest-Energy-News/World-News/Mysterious-Cluster-Of-Saudi-Oil-Tankers-Off-Egypt-Raises-Storage-Concerns.html

https://oilprice.com/Latest-Energy-News/World-News/China-To-Release-Millions-Of-Barrels-Of-Imported-Oil-Stuck-At-Ports.html

 

SD

[Spekulatius]

Opec may be cutting , but the US shale cowboys are cranking - production hit a record last month:

 

[Ulti]

https://www.yahoo.com/finance/news/will-canadas-oil--gas-industry-join-europes-green-retreat-120337630.html

 

 

[Saluki]

On 7/8/2023 at 6:14 PM, SharperDingaan said:

Russia's recent 500K bbl/day cut back is roughly 15M bbl/month ... not far off the current floating capacity anchored off Egypt.

 

 

 

Transshipment is the elephant in the room that no one talks about.  When China boycotted US Soybeans during the Orange man's presidency, instead of shipping soybeans to the Port of Long Beach and over to China, farmers shipped them to Brazil, unloaded them, and all of a sudden they became Brazilian soybeans which picked up the slack. 

 

If the Russians are still pumping the stuff out of the ground, it's gotta go somewhere.  It just can't sail direct.  It's gotta do a layover somewhere to cover it's tracks.  Might be bullish for VLCC rates.  

[Spekulatius]

3 hours ago, Saluki said:

 

Transshipment is the elephant in the room that no one talks about.  When China boycotted US Soybeans during the Orange man's presidency, instead of shipping soybeans to the Port of Long Beach and over to China, farmers shipped them to Brazil, unloaded them, and all of a sudden they became Brazilian soybeans which picked up the slack. 

 

If the Russians are still pumping the stuff out of the ground, it's gotta go somewhere.  It just can't sail direct.  It's gotta do a layover somewhere to cover it's tracks.  Might be bullish for VLCC rates.  

Well, the Saudis have been buying Russian oil for a discount and use it for domestic consumption , so they can export more of their own. Any crude that is produced is going somewhere…

Edited July 13, 2023 by Spekulatius

[Sweet]

There is a difference between production and supply.  That Saudis for instance can produce at 10 million a day, supplying 9 million to the market, and putting 1 million in storage.  The Saudis have at least 150 million barrels of storage capacity which is currently empty.

[Ulti]

Excellent podcast

[Stuart D]

Thanks for posting - I liked the discussion on Texas controlling the oil price from the 1930’s.

[james22]

SPR Has a Refill Problem

 

The problem with refilling the SPR to the tune of nearly 300 million barrels is multifaceted. 

 

First, oil prices are still a bit above the level that the Biden Administration said would trigger purchasing action. Most short term forecasts are calling for price hikes instead, so the likelihood of prices falling to those levels soon is not estimated to be a sure thing. 

 

Second, 300 million barrels at a cost of even $70 per barrel would cost $21 billion for the oil alone.

 

Now, the Administration would argue that since it canceled congressionally mandated sales that had called for another 147 million barrels of crude oil to be sold from the SPR, it should be counted that it has already replaced 147 million barrels, leaving only 144 million left to purchase at a minimum cost of $10.8B with $70 oil.

 

What’s more, that cancellation resulted in Congress taking $12.5 billion away from the DoE that was to be used to repurchase crude oil, leaving it with just $4.3 billion of available cash to buy.

 

Nevertheless, the Administration is confident that it will refill the SPR, although the anticipated timing of the repurchases depend entirely on who in the Administration is doing the talking. 

 

Next up is the issue of infrastructure and feasibility of filling, withdrawing, refilling, etc. of the SPR. Those salt caverns are made of… well, salt, and according to SPR former project manager William Gibson, who spoke to Bloomberg, they were built—in the ‘70s—with the idea that they would last 25 years.

 

They were also designed to be withdrawn and refilled just five times, lest the salt caverns simply dissolve. As one former official put it, the caverns were “not really intended for daily ATM-type operations.”

 

Any buyback program would have to be slow-rolled in order to prevent price spikes—the very thing that triggered SPR sales in the first place. In March, even Energy Secretary Jennifer Granholm said that any repurchase scheme would take years.

 

https://oilprice.com/Energy/Crude-Oil/The-SPR-Could-Stay-Half-Empty-Forever.html

[james22]

On December 5, 2022, scientists at the Lawrence Livermore National Laboratory (LLNL) achieved something truly remarkable. After firing 192 lasers at a small pellet filled with deuterium-tritium fuel, the resulting reaction essentially created a tiny star for a few nanoseconds. Crucially, the energy created by this reaction was more than the energy put into the reaction. In other words, science had finally achieved nuclear fusion ignition.

Until that point, humans had never been able to recreate the life-giving power generated in the center of our Sun on Earth. But for the first time, the clean energy promise of nuclear fusion—arguably the greatest energy source imaginable—suddenly seemed possible. Now, fast forward only eight months, and LLNL has achieved ignition again. But this time, they had even greater results.

LLNL spokesperson Paul Rhien spoke with The Financial Times on Sunday, and said that “in an experiment conducted on July 30, we repeated ignition at NIF. Analysis of those results is underway, but we can confirm the experiment produced a higher yield than the December test.”

 

https://www.popularmechanics.com/science/green-tech/a44754208/scientists-achieve-second-fusion-ignition/

[Spekulatius]

Incremental progress, but a long way to go. I also want to point out that this process creates a lot of neutron radiation, which will make the materials in the reactor that absorb it radioactive.

[rkbabang]

In the short to medium term I'm far more bullish on fission nuclear power.  I think the US is going to eventually get off its ass and reduce the regulatory burden and allow advanced reactors to be built and built more quickly.  Even if the US doesn't do this other parts of the world will.

 

Nuclear Power Will Grow "Exponentially" In Low-Carbon World – Citigroup White Paper

https://www.wealthbriefing.com/html/article.php?id=198695

 

I'm invested in SRUUF right now and am looking for other ways to take advantage of this trend as well.

 

Fusion is interesting, and will probably eventually be how humanity generates its power, but it's not really actionable yet for an individual investor.