CALGARY, AB, Nov. 9, 2023 /CNW/ – InPlay Oil Corp. (TSX: IPO) (OTCQX: IPOOF) (“InPlay” or the “Company“) today announced that the Toronto Stock Exchange (“TSX“) has accepted InPlay’s notice of intention to renew its normal course issuer bid for a further one year term (the “NCIB“). The previous NCIB expired on October 16, 2023. Pursuant to the Company’s previous NCIB, the Company purchased in the open market through the facilities of the TSX and through other alternative Canadian trading platforms and cancelled an aggregate of 190,400 common shares (“Common Shares“) of the Company at an average price paid of $2.84 per Common Share.
Under the NCIB, InPlay may purchase for cancellation, from time to time, as InPlay considers advisable, up to a maximum of 6,637,064 Common Shares, which represents 10% of the Company’s public float of 66,370,643 Common Shares as at October 31, 2023. As of the same date, InPlay had 90,925,401 Common Shares issued and outstanding. Purchases of Common Shares may be made on the open market through the facilities of the TSX and through other alternative Canadian trading platforms at the prevailing market price at the time of such transaction. The actual number of Common Shares that may be purchased for cancellation and the timing of any such purchases will be determined by InPlay, subject to a maximum daily purchase limitation of 43,809 Common Shares which equates to 25% of InPlay’s average daily trading volume of 175,239 Common Shares for the six months ended October 31, 2023. InPlay may make one block purchase per calendar week which exceeds the daily repurchase restrictions. Any Common Shares that are purchased by InPlay under the NCIB will be cancelled.
The NCIB will commence on November 14, 2023 and will terminate on November 13, 2024 or such earlier time as the NCIB is completed or terminated at the option of InPlay.
InPlay believes that renewing the NCIB is a prudent step in this volatile energy market environment, when at times, the prevailing market price does not reflect the underlying value of its Common Shares. The timely repurchase of the Company’s Common Shares for cancellation represents confidence in the long term prospects and sustainability of its business model. This reduction in share count adds per share value to InPlay’s shareholders and adds another tool to management’s disciplined capital allocation strategy.
With the base dividend of $0.015/share per month, NCIB share repurchases and the Company’s continued efforts towards towards overall production per share growth, InPlay will be able to continue with its strategy of providing strong returns to shareholders.
About InPlay Oil Corp.
InPlay Oil is a junior oil and gas exploration and production company with operations in Alberta focused on light oil production. The Company operates long-lived, low-decline properties with drilling development and enhanced oil recovery potential as well as undeveloped lands with exploration possibilities. The Common Shares on the Toronto Stock Exchange under the symbol IPO and the OTCQX under the symbol IPOOF.
For further information please contact:
Doug Bartole President and Chief Executive Officer InPlay Oil Corp. Telephone: (587) 955-0632
This news release contains certain statements that may constitute forward-looking information within the meaning of applicable securities laws. This information includes, but is not limited to InPlay’s intentions with respect to the NCIB and purchases thereunder and the effects of repurchases under the NCIB. Although InPlay believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because InPlay can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions by their very nature they involve inherent risks and uncertainties. Actual results could defer materially from those currently anticipated due to a number of factors and risks. Certain of these risks are set out in more detail in InPlay’s Annual Information Form which has been filed on SEDAR+ and can be accessed at www.sedarplus.com.
The forward-looking statements contained in this press release are made as of the date hereof and InPlay undertakes no obligation to update publically or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
The ongoing fighting between Israel and Hamas risks causing substantial disruptions to the global oil market, threatening to send crude prices to unprecedented levels according to a new warning from the World Bank.
In a worst-case scenario where the conflict escalates and key oil producing nations impose embargos, oil prices could surge as high as $157 per barrel. That would far surpass the previous record of $147 set in 2008 and have dramatic ripple effects across industries.
The World Bank laid out various scenarios in its latest commodity outlook report. In a “large disruption” comparable to the 1973 Arab oil embargo, global supplies could drop by 6 to 8 million barrels per day. This massive shortage of oil on the international market would cause prices to jump by 56-75%, catapulting prices up to the $140 to $157 range.
The crisis in 1973 quadrupled oil prices after Arab producers like Saudi Arabia and Iraq imposed an export ban on nations supporting Israel in the Yom Kippur War. While neither Israel nor Hamas are major oil exporters themselves, provoking producers in the surrounding region poses a major risk.
Surging crude prices would directly impact consumers at the gas pump. Each $10 rise in the cost of a barrel of crude translates to about a 25 cent increase in gas prices according to analysts. That means if oil hit $150, gas could surge above $4 per gallon nationally, far exceeding the recent highs earlier this year. Areas like California would likely see prices cross $5 or even $6 per gallon.
High fuel costs not only hurt commuters but drive up expenses for the transportation industry. Airlines would be forced to raise ticket prices to cover the inflated expense of jet fuel. Trucking and freight companies would also pass on the costs through higher shipping rates, feeding inflation throughout the economy.
Plastics and chemical manufacturers dependent on petrochemical feedstocks would see margins squeezed as oil prices stay elevated. Other goods with significant transportation expenses embedded in their supply chains would also see prices increased.
The pain would not be limited to oil-reliant sectors. As consumers are forced to spend more on transportation and energy needs, discretionary income gets reduced. This results in lower spending at retailers, restaurants and entertainment venues. Tourism also declines as pricier gas dissuades vacations and trips.
In essence, persistently high oil prices threaten to stall the economy by depressing spending, raising inflation and input costs across many industries all at once. While the US is now a net exporter of crude and refined fuels, it remains exposed to global price movements shaped by international events.
The World Bank warned that an escalation of the Israel-Hamas tensions could create a dual supply shock when combined with reduced oil and gas exports from Russia. Global markets are still reeling from the loss of Russian energy supplies due to Western sanctions and bans.
Prior to Russia’s invasion of Ukraine, investment bank Goldman Sachs had predicted oil could reach $100 per barrel this year. The fighting has already caused prices to spike above $120 at points, showing how geopolitical instability in one region can roil prices worldwide.
The grim scenarios described by the World Bank underscore the interconnectedness binding energy markets across the globe. An event thousands of miles away increasing instability in the Middle East could end up costing American consumers, businesses, and the economy dearly.
While the baseline forecast calls for prices to moderate over the next year, an expansion of the Israel-Hamas conflict could upend those predictions. Investors, businesses, and policymakers must watch the situation closely to prepare for the economic impacts of further turmoil.
All parties involved must also be cognizant of how violence that disrupts oil production and trade risks global fallout. Diplomatic solutions take on new urgency to prevent a worst-case scenario that would inflict widespread hardship as oil races past $150 per barrel into uncharted territory.
In a bold move to combat surging fuel prices and rampant inflation, President Biden is unleashing a flood of black gold onto the markets. The White House is planning to tap a massive 180 million barrels of crude oil from the nation’s Strategic Petroleum Reserve (SPR) – the biggest withdrawal in the reserve’s history.
The news sent oil prices tumbling 5% in early trading as speculators reacted to the supply boost. But will the SPR floodgates really succeed in taming the oil price beast that has economists worried about recession?
The sheer size of the release, equivalent to two full days of global oil consumption, grabbed headlines. Set to be gradually emptied over several months, Biden’s SPR unleashing is meant to act like a shot of bear tranquilizer for the raging oil market.
Ever since Russia’s invasion of Ukraine, reduced supply from the world’s No. 2 exporter combined with surging demand has driven prices to their highest levels since 2008. Brent crude already flirted with a mind-boggling $140 per barrel in March. Even after the SPR news-driven dip, benchmark oil remains stubbornly high at around $105.
For Biden, doling out the emergency crude is a midterm elections Hail Mary pass. Painfully high gas prices have contributed to the president’s dismal approval ratings. Tapping the SPR to lower fuel costs may be his best bet to avoid Democrats enduring a disastrous drubbing by the Republicans in November.
Beyond politics, uncorking America’s oil reserves also sends an important message to the market. It signals the Administration’s determination to fight an inflation rate that keeps printing four-decade highs. Few things impact inflation expectations like changes in oil prices. A meaningful drop could help tamp down the runaway price increases eroding consumer confidence.
But will the effort succeed or will it flounder like past attempts? With global crude inventories at historic lows, many analysts see the SPR release as a mere band-aid solution. It provides some short-term relief but doesn’t fix the supply and demand imbalance.
Goldman Sachs estimates the 180 million barrel slug will help rebalance markets this year. But it warned the move doesn’t resolve the structural deficit caused by excluding Russian exports.
Previous SPR releases also failed to produce lasting effects. Oil prices quickly rebounded after 60 million barrels were tapped in November 2021 and another 30 million in March 2022.
This time, the White House is also counting on allies for help. The International Energy Agency meets soon to potentially coordinate a collective release from its members’ reserves.
But Biden’s SPR gambit already seems at odds with other moves meant to restrict oil supply and fight climate change. Canceling the Keystone XL pipeline permit and banning new federal drilling auctions counterproductively worsened the supply crunch. A of couple million extra daily barrels from those sources would have eased pressure on prices.
The Administration now finds itself trying to fix with one hand problems partly created by the other. That internal tension undermines the large SPR release’s credibility.
Traders also scoffed when OPEC refused to boost production more than a token amount after the U.S. lobbied for extra output. With the cartel and allies like Russia benefitting handsomely from $100+ oil, they have little incentive to pump much more.
Meanwhile, risks of a demand-killing recession loom if the Fed’s inflation fight requires jumbo interest rate hikes. And Covid lockdowns in China already hurt oil demand in the world’s largest importer.
So while Biden’s SPR flow should offer some near-term relief at the pump, it may not move the needle much for long. Markets fear what happens if 180 million barrels merely postpones the supply day of reckoning rather than preventing it.
With inventories low, spare capacity shrinking, geopolitical unrest continuing, and ESG considerations constraining investment, oil looks poised to remain highly volatile. While the SPR release was historic in size, it likely won’t fully tranquilize the energy markets.
Oil prices surged over $2 per barrel on Friday as rising geopolitical tensions in the Middle East sparked fears of potential supply disruptions. Brent crude jumped 2.3% to nearly $90 per barrel, while WTI crude also gained 2.3% to exceed $85 per barrel. The abrupt price spike reflects growing worries among traders that intensifying regional conflicts could impact oil exports.
The increase came after U.S. forces conducted airstrikes on Iranian-backed militias in Syria. This retaliatory move followed attacks on American troops in the region by Iran-supported groups. The escalating tit-for-tat strikes raised concerns that oil-rich Iran could get dragged into a wider regional conflagration.
Iran’s foreign minister warned that the U.S. would “not be spared” from retaliation if Israel does not halt its ongoing offensive against Hamas forces in Gaza. Iran is a major oil producer and key Hamas backer, so any disruption to its exports would impact global supply.
The Gaza conflict has already killed dozens and shows no signs of abating despite international efforts. Israel continues to pound Hamas targets and says preparations for a ground invasion are underway. The potential for the violence to spill over into neighboring countries and inflame sectarian divisions adds another worrying dimension for oil markets.
While no direct oil infrastructure has been affected yet, the market is trading on fears of what could transpire if hostilities spread further. Key transit points like the Strait of Hormuz could be threatened if regional clashes escalate. About 17% of global oil shipments flow through this narrow passage from the Persian Gulf.
Even Saudi Arabia, the world’s top oil exporter, could see its supply chains disrupted if the chaotic conflicts metastasize. While its production facilities remain insulated so far, continued attacks between Israel and Hamas, along with the risk of Iranian retaliation on U.S. forces, are setting markets on edge.
Traders are operating with limited visibility into how much further tensions may rise or which countries could get sucked in. Major oil producers like Saudi Arabia, Iraq, and the UAE would be hard pressed to supplant any lost Iranian barrels in a tight market. The low spare capacity leaves oil supplies extremely vulnerable to regional instability.
With myriad conflicts simmering, anxious traders are bidding up prices based on a worst-case scenario of supply shocks. However, this geopolitical risk premium could evaporate quickly if the situation de-escalates. Much depends on how hardline regimes like Iran choose to counter Israeli and U.S. actions in the days ahead.
For now, investors should brace for more volatility as headlines oscillate between conflict and ceasefire. Oil markets will remain on edge, with prices whip-sawing on any indications that Middle East disputes could jeopardize supply flows. While an outright supply crunch may not emerge, the risk has clearly increased.
Traders are weighing these bullish supply disruption anxieties against bearish demand uncertainties. Resurgent Covid cases in China along with broader inflationary pressures and economic weakness continue to dampen the consumption outlook. For oil markets, layers of complexity will drive price gyrations going forward. Strap in for a bumpy ride.
In a significant move that underscores the ongoing transformation within the energy sector, Chevron (NYSE: CVX) has recently announced its acquisition of Hess (NASDAQ: HES) in a monumental $53 billion all-stock deal. This mega-merger comes on the heels of Exxon Mobil’s $60 billion bid for Pioneer Natural Resources, marking the second colossal consolidation among major U.S. oil players this month.
The strategic significance of this merger revolves around the ambitions of both Chevron and Exxon to unlock the untapped potential of Guyana’s burgeoning oil industry. Guyana, once an inconspicuous player in the oil sector, has rapidly ascended the ranks to become one of Latin America’s foremost oil producers, second only to industry giants Brazil and Mexico, thanks to substantial oil discoveries in recent years.
This high-stakes deal positions Chevron in direct competition with its formidable rival, Exxon, in the race to capitalize on Guyana’s newfound prominence. Chevron’s offer, consisting of 1.025 of its shares for each share of Hess or $171 per share, represents a premium of approximately 4.9% to the stock’s most recent closing price. The total value of the transaction, encompassing debt, amounts to a staggering $60 billion.
Upon the successful completion of this transaction, John Hess, CEO of Hess Corp, is set to join Chevron’s board of directors, cementing the collaborative vision of the two energy giants. Chevron has also expressed its commitment to fortify its share repurchase program, intending to bolster it by an additional $2.5 billion, reaching the upper limit of its annual $20 billion range. This decision underscores Chevron’s confidence in future energy prices and its robust cash generation.
Notably, this merger serves as a testament to Chevron’s unwavering dedication to fossil fuels. In a climate where global energy dynamics are evolving rapidly, Chevron’s move underscores a resolute belief in the enduring strength of oil demand. Large energy producers continue to employ acquisitions as a strategy to replenish their reserves after years of underinvestment, further highlighting the industry’s drive to secure its future in a dynamically shifting landscape.
This merger between Chevron and Hess not only signals the industry’s determination to harness the full potential of Guyana’s oil reserves but also represents a pivotal moment in the evolution of the energy sector, as established players seek new avenues for growth and consolidation in a rapidly changing world. The deal is expected to close around the first half of 2024, setting the stage for a new chapter in the energy industry’s ongoing narrative.
Oil giant Exxon Mobil is making a huge bet on shale with its just-announced $59 billion all-stock acquisition of Pioneer Natural Resources, one of the largest producers in the Permian Basin of West Texas and New Mexico. Shale oil is a type of unconventional oil found in shale rock formations that must be hydraulically fractured to extract the oil.
The deal, which is Exxon’s biggest since its merger with Mobil in 1999, will give it access to Pioneer’s large acreage position in the Permian, allowing Exxon to more than double its current production in the region to over 1 million barrels per day once the deal closes in 2024.
This massive expansion of Exxon’s shale oil production comes even as much of the industry has pulled back investments in new drilling due to investor pressure to improve returns and limit growth. While Exxon is already one of the most active drillers in the Permian, the addition of Pioneer’s operations will make it the largest shale oil producer in the basin by far.
The shale boom propelled U.S. oil production to record highs in recent years, though growth has slowed more recently. The Biden administration has also paused new leases for drilling on federal lands, creating uncertainty around future shale production. However, the industry is still projected to provide most new sources of oil supply worldwide in the coming years.
Exxon’s bet is that shale, especially the Permian where production costs are lowest, will continue to drive future growth. Pioneer outlined an ambitious plan last year to raise Permian production as high as 2 million barrels per day by 2030. Together, the companies expect to capture major cost savings by combining operations.
But analysts say the deal is not without risk for Exxon. While shale helped supercharge U.S. production, the industry has had a mixed track record of profitability. Investors have lost patience with shale companies struggling to deliver consistent returns, pushing firms like Pioneer to focus more on cost discipline and shareholder payouts rather than maximum production growth.
Outside shale, Exxon is also working to develop large, costly conventional oil projects offshore Guyana and in other regions to replenish reserves. Some analysts question whether Exxon might be spreading itself thin trying to balance massive shale drilling with high-stakes conventional projects.
More broadly for the oil industry, concerns around climate change have made the long-term outlook uncertain. With electric vehicles going mainstream and many governments setting net-zero emissions targets, peak oil demand may already be behind us according to some forecasts.
While Exxon says shale oil will be needed to meet global energy demand for decades to come, increasing pressure on the industry to reduce emissions led Pioneer to accelerate its own net zero target from 2050 to 2035 after the acquisition was announced. With shale methane emissions a major focus for policymakers, combining operations could allow for more investment in leak detection and reductions.
For now, Exxon seems confident in the value of shale, and particularly the Permian’s vast oil riches. The Pioneer deal positions it to be the dominant driller in the West Texas region as others pull back. But only time will tell whether the big bet on shale pays off or leaves Exxon overextended. The deal reflects one of the oil majors’ biggest signals of confidence yet that shale will continue driving growth well into the future.
Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.
Refer to the bottom of the report for important disclosures
Oil price rose 30% in the third quarter helping propel the XLE Energy Index up 11.4%. Natural gas prices also rose after twelve months of decline. Higher oil prices reflect declining inventories due to rising demand that is not being met by rising supply.
Domestic oil demand is rising. Oil demand largely tracks the economy. And, while monetary tightening has slowed growth, demand is still growing. Recently, domestic demand has increased due to warm summer weather and increased propane exports to Europe.
Oil supply is not keeping pace. OPEC+ extended its production cuts. In previous decades, domestic producers would respond to production cuts by accelerating drilling. In recent years, producers have not increased drilling as noted by a sharp decline in domestic oil rig activity. Oil drilling rigs even declined this quarter despite the rise in oil prices. Limited drilling, combined with sharper well decline curves, has meant supply is not keeping up with demand.
Small cap producers are uniquely positioned to take advantage of higher prices. The production gains that came from horizontal drilling and fracking in the Permian Basin appear to be waning. That means well profitability has declined as producers move on to secondary and tertiary targets. This is especially an issue for larger production companies that need a large number of wells drilled to provide growth. In addition, large companies face regulatory and investor pressures regarding fossil fuel production that the smaller companies may avoid.
Energy Stocks
Energy stocks, as measured by the XLE Energy Index, rose 11.4% in the 2023 third quarter as compared to a 3.6% decline in the S&P 500 Index. The outperformance was largely due to rising oil prices. The November 2023 futures contract rose 30% during the quarter. Natural gas prices rose 4.9% during the quarter largely reflecting normal seasonal trends.
Oil Prices
The rise in oil prices corresponds to a drop in inventories. After a covid-induced spike in early 2020, domestic inventories have fallen steadily. During this period of monetary tightening, demand growth has slowed but remained positive. Supply, on the other hand, has stagnated. OPEC+ has extended cutbacks and domestic drilling activity has declined.
Figure #1
Source: EIA
The decline in drilling activity can best be seen by looking at domestic oil rig activity. Where once there were more than 1600 active wells, now there are one-third that number. What’s more, oil drilling activity has continued to decline in the third quarter even as oil prices have risen.
Figure #2
Source: Baker Hughes
Weather has also played a part as warm temperatures have meant increased use of oil for electric generations. Although oil represents a small portion of the generation load, it is an important component in the summer months when generation demand is greatest. Temperatures in the United States have been warmer than average each month this summer and 17 of the 24 months over the last four years.
Figure #3
Finally, it is worth noting that petroleum exports have been growing. Exports jumped after the Ukraine invasion as the United States rushed to ship petroleum to Europe to offset Russian supply disruptions. Note the large jump in propane exports since 2021 in the chart below. Propane, a component of the crude oil barrel, is one of the easier fuels to export until additional liquified natural gas export terminals are completed.
Figure #4
The combination of limited drilling, growing demand for electric generation and exports, and OPEC production cuts bodes well for oil prices.
Natural Gas Prices
The story for natural gas is less positive but improving. Sharp declines last winter bottomed out in April and have slowly begun to creep back upward. Natural gas production profitability is not great at prices near $3.00 per thousand cubic feet (mcf) but still profitable.
Figure #5
Source: Nymex, EIA
Outlook
We believe the outlook for energy companies remains favorable. Oil prices are high and do not show signs of falling due to OPEC cuts, reduced domestic drilling and rising demand for power generation and exports. We believe the case for smaller cap energy stocks is especially strong because they are less liquid and slower to react to rising energy prices. Smaller energy companies also face less political and investor pressure to shift away from carbon-based production.
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Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis. Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.” FINRA licenses 7, 24, 63, 87
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Greenfire Resources, a Calgary-based oil sands company, began public trading on the New York Stock Exchange on Thursday through a merger with a special purpose acquisition company (SPAC). However, shares of Greenfire fell sharply on its debut, dropping around 11% in morning trading.
Greenfire combined with M3-Brigade Acquisition III Corp, a SPAC sponsored by New York-based private investment firm Brigade Capital Management. The deal, first announced in December 2022, valued Greenfire at $950 million.
The new company, Greenfire Resources Ltd, is now listed on the NYSE under the ticker “GFR”. But investors reacted negatively to the stock early on. After opening at $9.80 per share, GFR declined over 37% to around $6.10 by Friday morning.
SPAC deals have faced increased skepticism from investors amid high market volatility this year. Many companies that went public via SPACs have seen their share prices sink below initial trading levels. This broader SPAC downturn could be contributing to the weak debut for Greenfire.
Greenfire operates steam-assisted gravity drainage (SAGD) facilities in Alberta’s prolific oil sands region. It has a 75% stake in the Hangingstone expansion project, which came online in 2017, and 100% ownership of the adjacent Hangingstone demonstration facility. Both produce bitumen using steam injection to mobilize viscous oil sands deposits.
The company raised approximately $42 million through a private placement that closed concurrently with the SPAC merger on September 20. It also put in place $300 million in new senior secured notes and a $50 million senior secured credit facility to boost liquidity.
According to Greenfire’s management, the company will prioritize debt reduction in the near-term to strengthen its financial position. It also plans to increase production at its existing facilities through techniques like infill drilling and debottlenecking.
For example, Greenfire is currently drilling extended reach “refill” wells at the Hangingstone expansion site. These wells are intended to produce incremental volumes from between existing well pairs. No new drilling has occurred at the project since its commissioning in 2017.
In the long-term, Greenfire aims to generate free cash flow thanks to controlled capex spending and its high quality oil sands reservoirs. The company believes it has a structural cost advantage compared to some other SAGD operators in the Athabasca region.
Greenfire says its assets have long-life reserves and relatively low decline rates versus conventional oil and gas resources. For instance, the Hangingstone demonstration project has maintained steady production for nearly 20 years without new wells. This could support continued output for decades.
The company intends to initiate a shareholder returns policy over time once it has made sufficient progress on debt reduction. It also plans to evaluate potential acquisition opportunities to drive further growth down the line.
But in the short-term, investors seem cautious on the newly public company as oil prices waver. Energy stocks have seen significant volatility in 2022. Greenfire traded down double-digits in its NYSE debut as traders reacted hesitantly.
Its success at boosting production from existing assets through relatively low-cost techniques like infill drilling may dictate whether shares can rebound over the coming months. For now, the market is taking a wait-and-see approach with the SPAC-backed oil sands operator.
Explore other SPAC Mergers via SPACtrac reports from Noble Capital markets
Oil prices climbed over 1% Friday after Russia banned diesel and gasoil exports. The move aims to increase Russia’s domestic supply but reduces the global oil market.
West Texas Intermediate crude climbed back above $90 per barrel following the news. Brent futures also gained, topping $94. Energy analysts say the Russian ban will likely sustain upward pressure on oil prices near-term.
Russia is a leading diesel producer globally. How much the export halt affects US fuel prices depends on how long it remains in place, says Angie Gildea, KPMG’s head of energy. But any drop in total global oil supply without lower demand will lift prices.
The ban comes as US gas prices retreat from 2022 highs, now averaging $3.86 nationally. Diesel is around $4.58 per gallon. Diesel powers key transport like trucks and ships. The loss of Russian exports could spur further diesel spikes.
However, gas prices may keep easing for most of the US, says Tom Kloza of OPIS. Western states could see increases.
Kloza believes crude may rise $2 to $3 per barrel in the near-term. But gasoline margins are poised to shrink even if oil nears $100 again. The US transition to cheaper winter fuel could also limit price hikes.
Goldman Sachs sees Brent potentially hitting $100 per barrel in the next 12 months. Sharper inventory declines are likely as OPEC supply falls but demand rises, says Goldman’s head of oil research.
The White House has criticized OPEC+ for the production cuts. US gasoline demand recently hit a seasonal record high over 9.5 million barrels per day. Jet fuel use is also rebounding towards pre-pandemic levels.
Strong demand, paired with reduced Russian oil exports, leaves the market more exposed to supply disruptions. Hurricane Ian showed how quickly price spikes can occur.
The Biden Administration plans to keep tapping the Strategic Petroleum Reserve into 2023 to restrain cost increases. But further export bans or output reductions could overwhelm these efforts.
While tighter global fuel supplies might not directly translate to the US, Russia’s latest move signals volatility will persist. Energy prices remain sensitive to supply and demand shifts.
More export cuts could accelerate oil’s return to triple-digits. But for US drivers, the road ahead on gas costs seems mixed. Falling margins and seasonal shifts could limit prices, but risks linger.
Pain at the pump has made an unwelcome return, with gas prices rapidly rising across the United States. The national average recently climbed to $3.88 per gallon, while some states now face prices approaching or exceeding $6 per gallon.
In California, gas prices have spiked to $5.79 on average, up 31 cents in just the past week. It’s even worse in metro Los Angeles where prices hit $6.07, a 49 cent weekly jump. Besides California, drivers in 11 states now face average gas prices of $4 or more.
This resurgence complicates the Federal Reserve’s fight against high inflation. Oil prices are the key driver of retail gas costs. With oil climbing back to $90 per barrel, pushed up by supply cuts abroad, gas prices have followed.
West Texas Intermediate crude rose to $93.74 on Tuesday, its highest level in 10 months, before retreating below $91 on Wednesday. The international benchmark Brent crude hit highs above $96 per barrel. Goldman Sachs warned Brent could reach $107 if OPEC+ nations don’t unwind production cuts.
For consumers, higher gas prices add costs and sap purchasing power, especially for lower-income families. Drivers once again face pain filling up their tanks. Households paid an average of $445 a month on gas during the June peak when prices topped $5 a gallon. That figure dropped to $400 in September but is rising again.
Politically, high gas also causes headaches for the Biden administration. Midterm voters tend to blame whoever occupies the White House for pain at the pump, whether justified or not. President Biden has few tools to immediately lower prices set by global markets.
However, economists say oil and gas prices must rise significantly further to seriously jeopardize the U.S. economy. Past recessions only followed massive oil price spikes of at least 100% within a year. Oil would need to double from current levels, to around $140 per barrel, to inevitably tip the economy into recession, according to analysis.
Nonetheless, the energy resurgence does present challenges for the Fed’s inflation fight. While core inflation has cooled lately, headline inflation has rebounded in part due to pricier gas. Consumer prices rose 0.1% in August, defying expectations of a drop, largely because of rising shelter and energy costs.
This complicates the Fed’s mission to cool inflation through interest rate hikes. Some economists believe the energy volatility will lead the Fed to pencil in an additional quarter-point rate hike this year to around 4.5%. However, a dramatic policy response is unlikely with oil still below $100 per barrel.
In fact, some argue the energy spike may even inadvertently help the Fed. By sapping consumer spending power, high gas prices could dampen demand and ease price pressures. If energy costs siphon purchases away from discretionary goods and services, it may allow inflation to fall without more aggressive Fed action.
Morgan Stanley analysis found past energy price shocks had a “small” impact on core inflation but took a “sizable bite out of” consumer spending. While bad for growth, this demand destruction could give the Fed space to cool inflation without triggering serious economic damage.
For now, energy volatility muddies the inflation outlook and complicates the Fed’s delicate task of engineering a soft landing. Gas prices swinging upward once again present both economic and political challenges. But unless oil spikes drastically higher, the energy complex likely won’t force the Fed’s hand. The central bank will keep rates elevated as long as underlying inflation remains stubbornly high.
Oil markets and energy stocks often get painted with a broad brush. But within the sector, offshore drilling stocks offer upside that many investors are overlooking. Despite cries of peak oil demand, fundamentals for rig owners point to gains ahead.
The oil services sector has rocketed over 50% higher in the last year, soundly beating the S&P 500. Yet offshore drilling stocks remain unloved. This creates an opportunity for investors willing to take a contrarian bet.
The bull case lies in constrained supply and rapidly rising prices. ESG considerations have limited capital investment in new oil production. But robust demand has returned as pandemic impacts recede. This supply/demand imbalance has sent oil above $80 per barrel.
Day rates for offshore rigs are soaring as utilization rates stick near 90%. However, shipyards are focused on liquefied natural gas, not building fresh drilling ships. That means supply can’t catch up to growing demand in a hurry.
This grants pricing power to rig owners. Valaris, Noble, and Weatherford have emerged from bankruptcy with pristine balance sheets. Meanwhile Transocean boasts the most high-specification rigs, positioning it to profit from climbing day rates.
Yet valuations look disconnected from fundamentals. Offshore drillers trade at up to an 80% discount to replacement value, signaling the market doubts their potential. But conditions point to further gains.
Why Energy Could Shine for Investors
Beyond compelling fundamentals, two key reasons make energy stocks stand out right now:
Inflation hedge – Energy equities have historically held up well during inflationary periods. With prices still running hot, oil stocks may offer protection if high inflation persists.
Contrarian bet – Energy is the most hated sector this year, with heavy net outflows from funds. That sets up a chance to buy low while others are selling.
To be clear, the long-term peak oil argument holds merits. The global energy transition will likely constrain fossil fuel demand over time. But that shift will take decades to play out.
In the meantime, diminished investment and stiff demand creates room for shares like offshore drillers to run higher. For investors willing to make a contrarian bet, the neglected energy space offers rare value.
ESG Sours Sentiment But Oil Remains Key
What about the ESG push away from fossil fuels? Shift is clearly underway. But hydrocarbons still supply 80% of global energy needs. Realistically, oil and gas will remain vital to powering the world for years to come.
Market sentiment has soured on all things oil. But investors should remember that supply/demand, not narrative, ultimately drives commodity prices. Offshore drillers look primed to benefit from that dynamic.
While oil markets face uncertainty beyond the next decade, conditions now point to upside in left-behind niches like offshore drilling stocks. For investors who see value where others only see headwinds, forgotten energy corners may hold diamonds in the rough.
Saudi Arabia and Russia have extended their joint oil production cuts by 1.3 million barrels per day until the year’s end. This move caused oil prices to spike, with benchmark Brent crude exceeding $90 per barrel, a level unseen since November.
While this decision may lead to higher inflation and fuel costs, it also strains Saudi Arabia’s relations with the U.S., as President Biden had previously warned of “consequences” for Saudi-Russian cooperation due to Russia’s Ukraine conflict involvement.
Saudi Arabia plans to monitor market conditions closely and take further action if needed, aligning with OPEC+ efforts to stabilize oil markets. Russia will continue its daily 300,000-barrel cut.
Brent crude had traded between $75 and $85 per barrel since November before these announcements.
No immediate U.S. reaction, but past criticism of OPEC, Saudi Arabia, and Russia by U.S. lawmakers persists. Analysts predict these cuts may create global oil imbalances and push prices above $90 per barrel if there isn’t a significant economic downturn.
U.S. gasoline prices average $3.81 per gallon, slightly below the 2012 Labor Day high of $3.83, but the impact remains uncertain. Higher gasoline prices can raise transportation costs and contribute to inflation.
Take a moment to learn about InPlay Oil, a junior oil and gas exploration and production company with operations in Alberta focused on light oil production.
Saudi Arabia’s production cut, initiated in July, aligns with other OPEC+ countries extending cuts into the following year, yet previous cuts failed to significantly raise oil prices due to weak demand and tighter monetary policies. International travel’s revival is expected to boost oil demand.
Saudi Arabia aims to boost oil prices to fund its Vision 2030 initiative, diversifying its economy and creating jobs, including the $500 billion Neom city project. Balancing these goals, Saudi Arabia must manage its U.S. relationship, complicated by past tensions over Jamal Khashoggi’s killing. Recent negotiations include nuclear cooperation, raising nonproliferation concerns.
Higher oil prices from these cuts also aid Russia in funding the Ukraine conflict, as Western sanctions reduce Moscow’s revenues, leading to discounted oil sales.
These dynamics add complexity to the global geopolitical landscape surrounding oil production.
Oil prices are near flat on the month but have recently been rising. Meanwhile, the energy sector itself, relative to the overall market, is outperforming in a way that is getting attention as we move to September. Are the drivers of performance solidly in place to keep crude oil prices strong? Will the energy sector continue to benefit from factors impacting oil? We lay out factors impacting future price movements below.
Credit for the recent strength in oil has been given in part to the Saudi Arabian production cuts that began in July when the Saudi’s voluntarily lowered production by one million barrels a day starting in July. This quickly strengthened prices, which then fell off as concerns over China’s weakening economy, and global economies in general, grew. China is the world’s second-largest consumer of crude oil.
The U.S. has seen strong economic reports recently. The market is still reacting poorly to “good” news. This reaction also played into the direction of stocks and commodity prices. U.S. economic activity readings raised expectations for further monetary policy tightening by the Federal Reserve. The idea of heightened activity lifted U.S. Treasury yields and, along with them, the U.S. dollar. During the last week in August, weaker U.S. labor data served to ease some of the rise in yields.
Adding to the strength, this week, the Energy Information Administration (EIA) on Wednesday reported that U.S. commercial crude inventories fell by 10.6 million barrels for the week ending Aug. 25. That was the third straight weekly decline reported by the agency and the largest since the week ended July 28. U.S. commercial crude inventories have fallen by almost 34 million barrels over the past five weeks.
Inventories are now only 1.1% higher than the same week last year, even with over 100 million barrels having been released from the U.S. Strategic Petroleum Reserve during the 12 months.
A reversal to the upside after crude fell last week below support at $78 a barrel also coincided with the formation of what technicians refer to as a golden cross, this is when the 50-day moving average crosses above the 200-day moving average from below. This got the attention of commodity traders.
Source: EIA
Overall, the price paid per barrel of oil has been range-bound through 2023. The extended production cuts by Saudi Arabia and Russia were largely offset by fears about China’s economy flailing; it had been expected it would rebound strongly after pandemic lockdowns were lifted. Oil consumption did not rise as expected.
Source: EIA
There is also increasing indications the United States is relaxing sanctions on crude exports from Iran and Venezuela to keep prices from rising too much and in exchange for diplomatic objectives. The U.S. is the number one oil consumer.
Given still low inventories and a need to replenish the U.S. Strategic Oil Reserves there are market participants that remain bullish on oil prices and the energy sector. There are others that are more cautious, despite Saudi production cuts, as the chart above indicates, consumption recently fell below the level of production.
Take Away
Oil prices have been in a tight range all year. Better stock market performance from energy producers has in part been because of easing of rules concerning fossil fuels, and headway made on green energy projects. Consumption will increase and fall based on economic activity. Where the U.S. economy and global economy are headed is faced with more cross-currents than usual. Added supply to the U.S. may come from countries we don’t currently trade with. Those spigots can not be turned on quickly. This leaves oil and energy with a current trend upward but challenges down the road.
