Guest “You get what you pay for” by David Middleton
Hat tip to Jan from the Netherlands…
It’s Too Late To Avoid A Major Oil Supply Crisis
By David Messler – Jun 17, 2021
There are a number of observable trends in oil supplies and by extension prices, presently. I am going to discuss one of them in this article. A lack of capital investment in finding new supplies of oil and gas. A favorite analogy of mine comes to mind, the ship is nearing the dock. In nautical parlance that means the time for course corrections is at an end. So we shall see if that is the case for oil. The massive “ship” that is world oil demand is on an unalterable collision with supplies that will have profound implications for consumers. This key metric reveals what the future is likely to hold for our energy security as the world continues to recover from the virus to those who will listen. The level of drilling and by extension capital investment is insufficient and has been for a number of years to sustain oil production at current levels. It’s no secret that even with the lower break-even costs for new projects thanks to cost-cutting by the industry the last few years, oil extraction is a capital-intensive business. The chart below from WoodMac, an energy consultancy, shows just how severe the decline in capex has been.
The message to oil and gas companies has been pretty clear from the market, investment funds like Blackrock seeking green “purity” in the allocation of financing of new energy sources, and government edicts mandating carbon intensity reduction across the entire swath of society, and a transformation to renewable energy, that new supplies of oil and gas are not wanted.
In fact, an article carried in the Wall Street Journal noted that “Planned investment in oil supply globally falls about $600 billion short of what will be needed to meet projected demand by 2030, according to JPMorgan Chase & Co. analyst Christyan Malek. Pressure to deliver cash to shareholders, partly driven by worries about the long-run outlook for oil demand, has limited the industry’s ability to plow money into new projects, he said.” This reasoning was seconded in the article by another analyst.
“It’s just hard to see where the capital is going to come from to grow at a rate that will be needed from 2022,” said David Meaney, founding principal of Assert Capital Management LP. The Dallas-based hedge fund is positioning for higher oil prices through futures and options.”
To summarize. In an amazingly short period of time, the world has made an irreversible bet on green energy sources – solar, wind, and biofuels – being able to shoulder much of its energy burden. This is a transition without a track record and a very spotty roadmap of implementation. Time will tell if this bet will pay off. If my judgment is correct, we won’t have long to find out.
Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and office assignments. He currently maintains an independent training and consulting practice, and writes on energy related topics.
While demand for motor fuels has nearly recovered to pre-Shamdemic levels…
Jet fuel has been a laggard. Some even asserted that air travel would not recover… Well, that appears to be changing:
Airfare bargains vanishing as airlines seize on surging summer demand
By JUSTIN BACHMAN AND MARY SCHLANGENSTEIN, BLOOMBERG NEWS
TRIBUNE NEWS SERVICE |
JUN 15, 2021
The days of bargain basement airfares are ending as the U.S. vaccine supply unleashes a wave of pent-up travel demand.
A rebound in trips to visit friends and family coupled with flight schedules that remain below 2019 levels means more flyers chasing fewer seats. That’s pushing up trip costs for the peak summer season as carriers reboot revenue management tools — which raise fares in line with stronger seat demand — after a year in which planes often flew with rows of empty seats.
The Larry Finks of the world didn’t seem to factor supply and demand or the laws of physics into their “irreversible bet on green energy sources – solar, wind, and biofuels – being able to shoulder much of its energy burden.”
While it’s very annoying that these piss-ants think they can change the laws of physics by starving the oil & gas industry of capital, most of the industry is fine with lower CapEx and more free cash flow…
As Inflationary Pressures Mount, Impacts on Oil and Gas Production Could Intensify
BY KEVIN DOBBS
June 13, 2021
U.S. oil producers overall have been reluctant to ramp up output even as crude prices climb and demand rebounds. They have focused on generating cash flow and exercised patience as the economy recovers from the pandemic.
But shortages of supplies needed for drilling and resulting inflation amid coronavirus fallout could extend the trend and keep production in check into 2022. Citigroup Inc. analysts said in a June report that inflation could eclipse 12% in the North American oil and gas sector by the end of 2021, driven up by rising costs for everything from steel to cement.
All of this helps to explain why U.S. producers reiterated their caution when speaking with investors in recent weeks. Houston-based Marathon Oil Corp., for example, said in May it would hold firm to its $1 billion capital expenditures budget in 2021 even if oil prices keep rising.
“We will simply generate more free cash flow and further solidify our standing as an industry leader when it comes to capital discipline,” CEO Lee Tillman said during a call to discuss first quarter earnings, echoing several of his peers.
Assuming a $60/bbl West Texas Intermediate oil price, the independent expects to generate $1.6 billion of free cash flow this year, he said. Marathon has a mandate to return at least 30% of cash flow from operations to investors and is on track to return more than 40% in 2021.
With some commodities traders betting on $100/bbl oil, this classic 1978 Saturday Night Live skit comes to mind:
A Special Message From the President of the United States
President Jimmy Carter…..Dan Aykroyd
[ open on Presidential seal ]
Announcer: And now, a special message from the President of the United States.[ dissolve to Oval Office ]
President Jimmy Carter: Good evening. On Tuesday, we Americans will have the opportunity to exercise our role as citizens in a free democracy. Yet, only a third of the eligible voters will actually cast ballots. The other two-thirds are, in a sense, very lucky. Because they do not know what’s going on.
Last week, I delivered a message on inflation. Since then, the dollar has dropped in value, the stock market has sustained record losses, and the whole sow price index increased 0.9%. In other words, our economic system is screwed, blued and tatooed! We just have to face the fact that there is simply no way to fight inflation in a capitolly-intensive, highly-technological, conflict-riddled, anything-for-a-thrill world of today. That’s why, tonight, I want you to try to look for in inflation, an entirely new word: Inflation is our friend.
For example, consider this: in the year 2000, if current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean – most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn’t you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would! But what about people on fixed incomes? They have always been the true victims of inflation. That’s why I will present to Congress the “Inflation Maintenance Program”, whereby the U.S. Treasury will make up anyinflation-caused losses to direct tax rebates to the public in cash. Then you may say, “Won’t that cost a lot of money? Won’t that increase the deficit?” Sure it will! But so what? We’ll just print more money! We have the papers, we have the mints.. I can just call up the Bureau of Engraving and say, “Hi! This is Jimmy. Roll out some of them twenties! Print up a couple thousand sheets of those Century Notes!” Sure, all these dollars will cause even more inflation, but who cares? Everyone will be a millionaire!
In my speech last week, I said that America would have to undergo an austerity program, but since this revolutionary new approach welcomes inflation, our economy will be free to grow, and we can spend, spend, spend! I believe the watchwords for the 80’s should be “Let’s Party!” And in that spirit, I’d like to say, “Live, from New York, it’s Saturday Night!”