MY TAKE: The only thing that explains the recent pullback in the price of oil is the FEAR of a recession. Yes, a deep recession will lower oil demand. However, this world is "short oil" and Europe is just at the beginning of a serious energy crisis. Upstream companies are still underinvesting in exploration and known oil reserves are being depleted faster than new oil reserves are being added. OECD Petroleum Inventories are low and continue to fall. Eventually, "rationing by price" of refined products will be necessary.
Bottomline: FEAR based selloffs don't last.
-----------------------------------------
From Bloomberg by Debbie Carlson
(MarketWatch) -- Underinvestment in the production of oil and gas will buoy
commodity prices
The disconnect between gains in energy stocks and the slump in crude oil
prices suggests that something has to give. Energy market analysts say oil
prices are more likely to rise than stocks are to fall.
The S&P 500 Energy Sector SPDR ETF (XLE) has risen 50% this year, representing
the best-performing sector in the S&P 500 Index . Top-five holdings are Exxon
Mobil (XOM), Chevron (CVX), Schlumberger (SLB), EOG Resources (EOG) and
ConocoPhillips (COP).
Energy stocks hit a 2022 high in mid-November, even as WTI crude has gradually
sunk 40% since June. Russia's invasion of Ukraine ignited oil's rally in the
first half of the year. Still, energy stocks have had staying power, as many
are keeping production stable while lowering debt and buying back shares.
Crude-oil prices retreat
Crude oil's weakness stems from concerns of lower Chinese demand as the
country continues with its zero-covid lockdown policy, says Stacey Morris,
head of energy research at financial consultancy VettaFi. Market participants
also have been worried about the impact of a slowing global economy on energy
demand.
Focusing on oil's price overlooks the bigger energy picture, Morris says.
Front-month natural gas futures prices are also down from this year's highs,
but are up 90% year-to-date. That's significant, since many energy companies
will produce natural gas when they drill for crude oil.
The spread between crude-oil prices and the eventual products, known as
distillate crack spreads, remains high, says Jay Hatfield, CEO of InfraCap, an
energy infrastructure investment firm. That's why he thinks concerns over
front-month crude oil price weakness is overdone. He estimates crude oil
prices will range between $85 and $105 as the market heads into winter.
Energy-stock prices ride high
Stewart Glickman, deputy research director at CFRA Research, says that while
energy stocks are sharply outperforming the commodity, the same isn't true
over the past three to five years.
"In some ways, I think this is a bit of a catchup. Over a longer-term basis,
it's actually not so far out of whack," Glickman says.
While energy prices are off their highs, the structural supply issue for the
commodity hasn't changed, which is a systematic underinvestment in crude oil,
Glickman says.
Underinvestment will ultimately support energy stocks in the longer term, says
Bob Leininger, a portfolio manager at Gabelli Funds, including the $2 billion
Gabelli Equity Trust (GAB).
Looking at oil prices across the futures curve, most deferred contract months
are trading around $75 to $80 a barrel. Those contracts haven't experienced
the same price gyrations as the nearby contract, which suggests stability and
should give some comfort to energy-stock bulls. VettaFi's Morris says U.S.
energy firms are still making profits by pumping at these lower levels.
Investors can't make back-of-the-envelope math calculations to equate the
price of crude oil with energy firms, InfraCap's Hatfield says, especially the
so-called super majors such as Exxon Mobil and Chevron, which are diversified
over several business lines.
"Everybody thinks there's a simple equation [of] oil price times volume equals
Chevron price," he says.
How to differentiate energy stocks
Charles Lemonides, founder of hedge fund ValueWorks, says investors shouldn't
necessarily look at oil stocks as a group, saying there's been much
variability in equity price action.
While he owns Bakken-based fracker Chord Energy Corp (CHRD) and liquefied
natural gas producer Cheniere Energy (LNG), ValueWorks has begun to sell short
Occidental Petroleum (OXY). Lemonides says the price is elevated because it's
been heavily bought by billionaire investor Warren Buffett and mutual fund
firm Dodge & Cox.
CFRA Research's Glickman has a "buy" opinion on Exxon Mobil and Permian-basin
fracker Pioneer Natural Resources (PXD), and rates EOG Resources (EOG) a "strong
buy."
He's positive on master limited partnerships as they increase pipeline
capacity, especially to build natural gas capacity. Natural gas is often a
byproduct of oil drilling, and that energy needs to be stored and moved.
Glickman says several pipeline companies are publicly discussing interest in
building more gas takeaway capacity, which he says will likely be sent to the
Gulf Coast.
"Then you can liquefy it, put it on a boat and send it to Europe, which is
looking for anyone but Russia for gas," he says.
CFRA has a "strong buy" rating on Targa Resources (TRGP) and a "buy" rating on
Enterprise Product Partners (EPD).
Leininger says Gabelli owns Halliburton (HAL) and Schlumberger in the
energy-services company space as a play on the need to increase energy
infrastructure over the next two decades.
The energy-market watchers say commodity prices are likely to fluctuate in the
coming months as long as Russia continues to dominate supply-side news.
"The bull case for energy is not going away unless the energy crisis in Europe
is resolved," InfraCap's Hatfield says.
-Debbie Carlson
(END) Dow Jones Newswires
What is the "Right Price" for crude oil?
What is the "Right Price" for crude oil?
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: What is the "Right Price" for crude oil?
OilPrice.com
Friday, December 9th, 2022
Thin liquidity is the mother of all current evils in the oil market. On paper, this week has provided ample reasons for an uptick – the easing of Chinese coronavirus restrictions, a US oil spill halting pipeline deliveries from Canada, and a massive queue of tankers that cannot pass the Turkish Straits. However, it seems nothing can bring oil prices back onto a growth trajectory this month. After all, whoever has made their profits over the course of 2022, risking them in such an unpredictable market would be quite unnecessary, which means $75-78 per barrel Brent might be here for longer than expected.
Turkish Straits Delays Worry Exporters. A protracted row between Turkish authorities and maritime insurance providers has overshadowed the launch of the Russian oil price cap this week, with almost two dozen tankers held up on a southbound voyage out of the Black Sea, not having the required P&I insurance documents.
Friday, December 9th, 2022
Thin liquidity is the mother of all current evils in the oil market. On paper, this week has provided ample reasons for an uptick – the easing of Chinese coronavirus restrictions, a US oil spill halting pipeline deliveries from Canada, and a massive queue of tankers that cannot pass the Turkish Straits. However, it seems nothing can bring oil prices back onto a growth trajectory this month. After all, whoever has made their profits over the course of 2022, risking them in such an unpredictable market would be quite unnecessary, which means $75-78 per barrel Brent might be here for longer than expected.
Turkish Straits Delays Worry Exporters. A protracted row between Turkish authorities and maritime insurance providers has overshadowed the launch of the Russian oil price cap this week, with almost two dozen tankers held up on a southbound voyage out of the Black Sea, not having the required P&I insurance documents.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: What is the "Right Price" for crude oil?
Paper oil traders likely standing in the Biden administration's "shoes" have to much control over physical oil prices. After all if the government has de facto control of the private sector social media market and Wall Street through ESG big boys like BlackRock where their Aladdin platform controls over 45%+ of the market algo, who's to say paper traders aren't working to drive the price of oil down at the behest of the US government. The parallels to the gold market futures for years has been uncanny. In fact its likely the template of paper oil traders/government alliance.
Re: What is the "Right Price" for crude oil?
What might be causing recent daily selloffs in the oil market are paper traders feeling the pressure of margin calls.
> The price goes up in the morning thanks to bullish news like China's softer stance on Covid restriction, Keystone Pipeline shutdown, crude oil inventory decline, US dollar weakness, etc. and the oil traders set higher stop loss orders.
> When the morning rally stalls, it just takes a few sell orders to trigger a lot of automated sales.
IMO we are near the point where just less FEAR of recession sends oil prices back over $80. Why?
> OECD petroleum inventories are too low and they keep falling.
> OPEC+ will cut production to stabilize the oil price.
> Some real winter weather in New England will expose how short we are on home heating oil supplies.
You may recall that Pre-Pandemic my estimated "Right Price" for WTI was $65/bbl.
> We came close to that price in Q4 2019 when the Phase One Agreement with China was signed to resolve the U.S. vs China Trade War.
> In 2020 Covid-19 changed everything.
> OECD Petroleum Inventories spiked higher; up to 33 Days of Consumption causing WTI to dip below $15/bbl for a few weeks in Q2 2020.
> By Q2 2021 OECD Petroleum Inventories were back to ~30 Days of Consumption and WTI spiked to $74 in July 2021 and actually reached $83 in October 2021.
> FEAR of several Covid Variants caused short-lived oil-price pullbacks in 2H 2021
> We seemed to finally move past FEAR of Covid in early 2022 and WTI moved up steadily to $90 in Feb 2022.
> Russia invaded Ukraine in late Feb 2022, creating extreme uncertainty in the global oil market. Oil spiked to over $120/bbl.
> When it became clear that Russia still had enough buyers for their oil, Brent and WTI pulled back.
> For now the world has just enough oil to meet demand, but only because we've drained the SPR.
> OECD Petroleum Inventories dipped to 26 Days of Consumption in Q4 2021 but they moved back to 27 Days of Consumption in Q3 2022, thanks in part to less consumption in Europe.
Here is what should push oil prices higher:
> Europe is going to burn through a lot of heating oil this winter.
> SPR draws will eventually have to stop.
> U.S. oil production is seasonal, peaking in November and declining December to March each year.
> Unless Biden drops the War on Fossil Fuels, I see almost zero chance of U.S. oil production returning to pre-pandemic level until he is out of office.
> OPEC+ now controls the oil price and they will cut production to get a "Fair Price" for their oil.
> The G7 price-cap on Russian oil might not take much Russian oil off the market, but the insurance restrictions and countries outside of Russia having some fear of sanctions on them might have an impact.
> Raymond James' forecast is that OECD Petroleum Inventories will drop rapidly after the SPR draws stop and reach just 25 Days of Consumption by Q4 2023. At that point we may see some refineries unable to get enough feedstock. If so, rationing of refined products may be necessary. If we aren't in a recession by then, high fuel prices will push the western economies into a deep recession.
Natural Gas
It is very important that all of you understand that the U.S. natural gas market is MUCH DIFFERENT THAN THE GLOBAL OIL MARKET. Weather will determine our natural gas price.
> The price goes up in the morning thanks to bullish news like China's softer stance on Covid restriction, Keystone Pipeline shutdown, crude oil inventory decline, US dollar weakness, etc. and the oil traders set higher stop loss orders.
> When the morning rally stalls, it just takes a few sell orders to trigger a lot of automated sales.
IMO we are near the point where just less FEAR of recession sends oil prices back over $80. Why?
> OECD petroleum inventories are too low and they keep falling.
> OPEC+ will cut production to stabilize the oil price.
> Some real winter weather in New England will expose how short we are on home heating oil supplies.
You may recall that Pre-Pandemic my estimated "Right Price" for WTI was $65/bbl.
> We came close to that price in Q4 2019 when the Phase One Agreement with China was signed to resolve the U.S. vs China Trade War.
> In 2020 Covid-19 changed everything.
> OECD Petroleum Inventories spiked higher; up to 33 Days of Consumption causing WTI to dip below $15/bbl for a few weeks in Q2 2020.
> By Q2 2021 OECD Petroleum Inventories were back to ~30 Days of Consumption and WTI spiked to $74 in July 2021 and actually reached $83 in October 2021.
> FEAR of several Covid Variants caused short-lived oil-price pullbacks in 2H 2021
> We seemed to finally move past FEAR of Covid in early 2022 and WTI moved up steadily to $90 in Feb 2022.
> Russia invaded Ukraine in late Feb 2022, creating extreme uncertainty in the global oil market. Oil spiked to over $120/bbl.
> When it became clear that Russia still had enough buyers for their oil, Brent and WTI pulled back.
> For now the world has just enough oil to meet demand, but only because we've drained the SPR.
> OECD Petroleum Inventories dipped to 26 Days of Consumption in Q4 2021 but they moved back to 27 Days of Consumption in Q3 2022, thanks in part to less consumption in Europe.
Here is what should push oil prices higher:
> Europe is going to burn through a lot of heating oil this winter.
> SPR draws will eventually have to stop.
> U.S. oil production is seasonal, peaking in November and declining December to March each year.
> Unless Biden drops the War on Fossil Fuels, I see almost zero chance of U.S. oil production returning to pre-pandemic level until he is out of office.
> OPEC+ now controls the oil price and they will cut production to get a "Fair Price" for their oil.
> The G7 price-cap on Russian oil might not take much Russian oil off the market, but the insurance restrictions and countries outside of Russia having some fear of sanctions on them might have an impact.
> Raymond James' forecast is that OECD Petroleum Inventories will drop rapidly after the SPR draws stop and reach just 25 Days of Consumption by Q4 2023. At that point we may see some refineries unable to get enough feedstock. If so, rationing of refined products may be necessary. If we aren't in a recession by then, high fuel prices will push the western economies into a deep recession.
Natural Gas
It is very important that all of you understand that the U.S. natural gas market is MUCH DIFFERENT THAN THE GLOBAL OIL MARKET. Weather will determine our natural gas price.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: What is the "Right Price" for crude oil?
Looks like this news is a game changer..... What is the right price of oil in yuan?
https://12ft.io/proxy?q=https%3A%2F%2Fg ... 1.92606767
https://12ft.io/proxy?q=https%3A%2F%2Fg ... 1.92606767
Re: What is the "Right Price" for crude oil?
If we don't stop the War on Fossil Fuels and get back to a common sense energy plan soon, the US middle class is in big trouble. The US relationship with Saudi Arabia is much more important than people realize.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: What is the "Right Price" for crude oil?
European Commission continues to believe that punching themselves in the face and kicking themselves in the groin will cause Putin to acquiesce. But clearly this is a dangerous stage craft of melodrama. From the article:
"What kind of problems will the EU face given that Russia’s Deputy Prime Minister Alexander Novak specified earlier that if the cap came into effect, Russia would either redirect its crude supply or slash production?
"China and India are already filling the gaps. Russian oil will be blended in the Bahamas or other storage ports and then sent back to EU refineries. It’s all shadow play and theater. The main goal, as I said, was to make the oil markets less efficient, raising costs while starving it of capital at the same time. "
https://www.zerohedge.com/energy/luongo ... lling-gaps
"What kind of problems will the EU face given that Russia’s Deputy Prime Minister Alexander Novak specified earlier that if the cap came into effect, Russia would either redirect its crude supply or slash production?
"China and India are already filling the gaps. Russian oil will be blended in the Bahamas or other storage ports and then sent back to EU refineries. It’s all shadow play and theater. The main goal, as I said, was to make the oil markets less efficient, raising costs while starving it of capital at the same time. "
https://www.zerohedge.com/energy/luongo ... lling-gaps