Tag: Oil

The Ups and Downs of Oil Prices

The benefit of a recessionary economy is it helps to correct supply-demand imbalances. An obvious negative to this is it does so in a way where demand drops, causing supply to be more closely matched. This brings about downward pressure on prices. The price of oil is now where it was in January, before the Russian invasion of Ukraine, and before the partial ban on Russian oil by many large consumers.

The nine-month lows are a market response to an expected decline in economic activity as rising interest rates increase the potential for a deeper global recession – with further price pressure coming from a surging U.S. dollar.

Contracts for both Brent crude and WTI are up near 2% to start this final week of September, but are in part bouncing after a drop of 5% on Friday.

Another factor working against oil price increases is the strength of the dollar. The dollar index measures the $USD against a basket of major currencies; it has climbed to a 20-year high. Dollar-denominated oil has become much more expensive around the globe as oil is transacted in $USD. This pricing also has helped reduce demand for crude.

Five Reasons Oil and Energy May Tick Back Up

Yields on Eurozone government bonds are now rising. This may slow or reverse the strengthening of U.S. dollars as higher yields make them more competitive with U.S. government bonds. This could slow or reverse foreign exchange considerations and stem the rising cost of oil (after conversion to $USD) and help put upward pressure on demand.

Winter is approaching in Europe, and demand naturally picks up in the colder months for petroleum products. This additional demand would begin about the time that Europe has planned a full embargo on imports from Russia. A full embargo would halt the current 1.3 million barrels a day reaching the West. This supply would then have to be filled from other sources which would be expected to put upward prices on oil.

The Biden administration is proposing to replenish crude pulled from the Strategic Oil Reserve under a plan that is likely to see it order 60 million barrels this fall for delivery at an unspecified time in the future. That leaves at least another 100 million barrels to bring the country back to where we were in March 2022 – over two hundred more to bring us back to the peak. This promises to keep demand up well past any current crisis.

It has been a quiet hurricane season for the Gulf states, but there are at least two months left before Florida, Texas, and Louisiana, can let their guard down. These months are known for the strongest, most powerful hurricanes. The shutting of offshore oil wells or production in preparation (or repair after any storm) could cause rapidly rising prices.

Data last week showed OPEC-plus missed its target by 3.58 million barrels per day in August; this is a bigger shortfall than in July. Prices trend with expectations, if OPEC-plus continues to fall short, this could provide for prices to rise.

Take Away

Oil price increases and the concomitant strength of the energy sector has been a standout among other investments in 2022. There has been a slide in both since early June. A recipe for higher levels may be coming together in  the months ahead as a multitude of factors come together that may reduce supply just as demand is building in the Northern hemisphere.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.reuters.com/markets/europe/euro-zone-yields-hit-new-multi-year-highs-after-global-rate-hikes-2022-09-22/

https://markets.businessinsider.com/news/commodities/russia-putin-oil-exports-europe-economic-retaliation-rbc-helima-croft-2022-9

https://www.reuters.com/business/energy/when-eu-embargo-comes-where-will-russia-sell-its-crude-oil-2022-09-23/

https://www.reuters.com/business/energy/oil-claws-back-some-losses-strong-dollar-caps-gains-2022-09-26/

https://www.reuters.com/markets/commodities/quiet-start-us-hurricane-season-takes-heat-out-oil-prices-

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How Long Can the Imbalance of Energy Production and Demand Continue?

During the first 19 months after taking office, the Biden administration has leased fewer acres for oil and gas drilling than any president’s first 19 months since Harry Truman (1945-46). Not long ago, Candidate Biden promised to stop drilling on federal lands to help force a transition to cleaner energy. This promise has mostly been kept. But it is getting more difficult for the 46^th POTUS. Demand pressures and reduced output caused oil prices to already be off its pandemic lows when Russia’s invasion of Ukraine gave way to a semi-embargo on Russian goods, which included oil and gas.

President Biden’s Interior Department leased 126,228 acres for drilling through Aug. 20, during his first 19 months in office. Analysts at the Wall Street Journal uncovered that no president since Nixon in 1969-70 leased out fewer than 4.4 million acres at this stage in their occupation of the White House.

Truman was the most recent to lease out fewer acres, 65,658. This was just after WWII at a time when offshore drilling was just beginning and the federal government didn’t yet control the deep-water leases that are the largest portion of the federal oil-and-gas program today.

The leasing program had tapered during the past decade as fracking shale became preferable to drilling offshore or on federal land. Biden’s use of land and deep-sea leases represents a decline of 97% as compared to the same time period of Trump’s stewardship which had declined 39% compared to his predecessor.

A record high number of drilling permits for existing leases were filed last year, according to The Interior Department . Department spokeswoman Melissa Schwartz told the Wall Street Journal that industry trends have driven most U.S. production to private and state-owned lands, and that of the roughly 35 million acres now leased from the federal government, about 60% aren’t actively producing.

As for offshore leases, the Biden administration has yet to complete a sale. It did hold one, on Nov. 17, offering 80 million acres in the Gulf of Mexico in a sale originally proposed by the Trump administration that would have been the largest offshore sale in U.S. history. It sold 1.7 million acres, but a federal judge invalidated the sale in January, ruling that the administration failed to do a proper environmental analysis.

One can either appreciate the resolve of the current administration in its effort to foster fewer emmited pollutants, or fault him for his role in curbing energy production and its contribution to higher prices and less energy independence.  If the measurement had been made as of the first 17 months of his presidency,  the acreage number would be zero, there were no onshore lease sales. The government then held five June 29-30.

Leases for oil and natural gas drilling is the beginning of the petroleum product supply chain. But, while there is no shortage of federal land, an escalation of lease sales now, or under any successor’s policies, would take years to build and deliver its first barrel.

The increase in gasoline and oil prices has caused the president to take steps to boost oil supplies. In late March the President said he’d be releasing as much as 180 million gallons from the strategic oil reserves over the following 180 days. This was unprecedented in its magnitude and a response to the doubling and tripling of gasoline prices.

Energy independence has been the goal of many of Biden’s predecessors. We live at a time when the call has been to prioritize policy that encourages transitioning to non-fossil fuel. This naturally has caused investors in resources like lithium and uranium to see price increases. Large oil price increases have also come from lower growth of petroleum supplies. Part of the relief valve the administration used, is tapping into the finite supply of strategic oil reserves. The current pace of using this resource is unsustainable.

This could indicate that energy investors, in fossil fuels and alternatives may see strong markets with demand outstripping supply going forward for some time.

Paul Hoffman
Managing Editor, Channelchek

Sources

https://www.blm.gov/programs/energy-and-minerals/oil-and-gas/leasing/regional-lease-sales

https://www.blm.gov/programs/energy-and-minerals/oil-and-gas/leasing

https://www.tri-cityherald.com/news/environment/article261303202.html

https://www.washingtonpost.com/climate-environment/2022/03/31/strategic-petroleum-reserve-release-biden/
https://www.wsj.com/articles/federal-oil-leases-slow-to-a-trickle-under-biden-11662230816