Energy Prospectus

The following is a note I received from Eric Snow at Energy Equities. I agree with all of his bullet points. My comments are in blue.

Energy prices tripled in ’72 and again in ’79, and will double or triple again in ’21-’22, again bringing slower GDP growth and inflation, in which E&Ps as inflation hedges will shine:

1. A global natural gas shortage could restrict heating in the U.K., Germany, France, and Spain and shutter some factories as Europe and Asia enter winter with the lowest gas inventories in twelve years;

2. A concurrent global oil shortage will face a 1.5mm b/d supply/demand deficit over the next six months, peaking at 1.9mm b/d or more in December on fuel switching from gas, with oil inventories reaching a 13-year low;
- Oil demand has already regained pre-Covid levels on faster than expected reopening demands, will grow 4.3% or 4.2mm b/d in 2022, and could grow another 0.2-0.3% or 0.2- 0.3mm b/d in the winter on fuel substitution from the natural gas shortage;
- Ida, the most destructive hurricane to GOM oil & gas supplies in history, has more than offset OPEC+ gains in output since July;
- As I have been telling you in my weekly podcasts for months, OECD petroleum inventories are falling fast and will soon dip below 27 days of supply. That will be the lowest level measured by days of supply in over 15 years. If OECD inventories drop to 25 days of supply I believe we might see $200/bbl oil.

3. Oil and gas supplies will remain constrained as energy capex reached a 15-year low in 2020 amid massive underinvestment, and E&Ps are showing little inclination to boost capex despite soaring prices, while the majors face pressures to cut capex to fight global warming; < I do expect our Sweet 16 to increase their D&C budgets in 2022, but it will not be enough to increase US oil production to where it was in November 2019 (12,860,000 BOPD).

4. OPEC+ has little inclination to accelerate its steady 400,000 b/d monthly rises, having resisted Biden’s call to do so, and now reiterating its staying with its planned rises; < They have no respect for Biden and definitely do not fear him.

5. OPEC will remain the main source of long term supply growth, as non-OPEC growth is restrained by investors’ and ESG demands and peaks this decade, leaving OPEC controlling long term oil markets, which will grow 1.3%/year despite solar, wind, and EVs, OPEC projects;

6. A global GDP deceleration amid inflation, shortages, China problems, and the Delta variant (now peaking, as we predicted in our 9/3 report) will culminate in a 1Q’22 dip on spiking energy prices, followed by somewhat lower growth in ’22-on, as inflation and shortages only gradually dissipate, while pent-up liquidity and shortages provide offsetting demand growth;

7. Inflation will persist, albeit at lower levels, as labor shortages drive big wage increases (oilfield included); energy prices remain high; shortages prove stubborn, compounded by scarce labor (e.g., to unload containerships, drive trucks); and the Fed pays the piper in abrogating its Congressional mandate of stable prices; but I.T. helps avert full stagflation;

8. Good inflation hedges, epitomized by E&Ps, will shine: David's Top Picks are GDP, OAS, OMP and PVAC​

9. $100/bbl oil and $8/mcf gas may be the new norm, translating into several years of rising cash flows and earnings as hedges roll down, making the E&Ps the new growth stocks for the several years ahead. China has been ordered to secure energy supplies at whatever cost, and options at $200/bbl are now trading, in this brave new world of scarce energy and high prices.

10. Gas will outperform oil, at 50% of the price of oil vs. 20% in the past, and gas stocks are still trading at lower multiples than oil stocks. Asian gas prices are now $30/Mmbtu, or $180/boe, three times their level in May and five times the U.S. price. European prices are $25/Mmbtu, or $150/boe. Citi has predicted an outside LNG case of $100/Mmbtu in Europe or $600/boe given a cold winter. As U.S. LNG facilities end maintenance, our prices could tug in these directions.

The National Weather Service predicts (with low confidence on such longer term forecasts) a slightly warmer than normal 4Q’21 for the U.S. as well as Europe (due to the same Arctic dynamics), which would avert a catastrophe but not higher prices. We are now in the shoulder months between summer and winter, so colder temps in any case lay ahead. It is expected to take 2-3 years to work out of this global gas shortage, with no new LNG or other mega projects until the middle of the decade, and Biden’s foot-dragging delaying Russian gas supplies to Europe. So as with oil, higher gas prices are here to stay.

CONCLUSION: "Buy them all." < Here he is talking about the small-cap upstream and midstream companies that he follows.

Putin is laughing all the way to the bank. Maybe we should impeach Trump again.

The Energy Report: Seven Year High
By Phil Flynn (Oct 05, 2021 09:44AM ET)

Global crude oil prices surged to a seven-year high as warnings about the coming energy crisis to global elites fell on deaf ears. Now we all have to pay the price. OPEC Plus is laughing all the way to the bank. After thumbing their nose at pressure from the Biden administration and other consuming nations to raise output more than the pre-planned 400,00 barrels a day, OPEC instead suggested that the global energy crisis was not of their making. And they are right.

This is an energy crisis created by short-sighted politicians and climate change fanatics who don’t understand the risks of closing down traditional energy production before you have a viable replacement. Global leaders who decided to rely on less reliable sources of energy like wind and solar should not be shocked that they are now short of energy supply.

England has already acknowledged that the lack of wind created a crisis. Labor shortages have also created a shortage of tanker drivers leading to shortages of petrol, as the English call it. Germany and the rest of Europe that closed down oil and gas fields and closed nuclear power plants, are now more dependent on Russia and the good graces of Vladimir Putin for supply. < There are known natural gas reserves sitting under Germany and Poland.

Zerohedge reports that,

“While European politicians have been busy trying to pin the cause of Europe’s energy crisis on the Kremlin and Gazprom (MCX:GAZP) in hopes of deflecting from their woeful mismanagement of European energy needs, not to mention their torrid push into green energy at the expense of fossil fuels when Europe is clearly not ready for a full transition and won’t be for years if not decades, the truth is that the European gas market crisis has highlighted the market’s unprecedented vulnerability to Russian supply.

"And, as Goldman writes in a recent note from its European gas analysts, Gazprom’s decision not to book for October the full capacity available at one of the main pipelines that deliver gas to Germany poses an increased tightening risk to NW European gas balances and, hence, (much higher) upside risk to TTF prices this winter."

In the U.S., natural gas supplies are still very tight but we’re in better shape than Europe. Yet the Biden administration is continuing to discourage U.S. production of natural gas. We too have a severe risk of price shocks. Take a look at natural gas prices overnight. They’re starting to move higher once again as the realization that winter is coming and our U.S. supply is below the five-year average. < We use a lot more natural gas during the winter than we did five years ago.

Last week the Energy Information Administration reported that the U.S. supply of 3,170 bcf is 15.4% below one year-ago levels and 6.3 percent below the five-year average. While we should see a triple-digit injection this week, the market is not convinced that supplies in the U.S. are adequate to keep prices under control.

Many people call me about their shock about these high prices. I keep reminding them they shouldn’t be shocked because a vote for Biden was a vote for higher energy prices. In his campaign he made it very, very clear that he wanted to move towards higher energy prices. His embracing the far left’s “Green New Deal” shows he was willing to sacrifice the poor in this country in terms of higher energy prices with the supposed noble goal of trying to save the planet.

The Biden administration is willing to attempt to transition off fossil fuels but it is very unclear whether or not they’re going to help U.S. consumers who could see their heating bills doubled or tripled this year. Joe Biden had the power to avoid this coming crisis but his ideology trumped common sense when it came to the energy transition. < Everyone on Team Biden is "Energy Ignorant". Them running our energy policy is like me doing brain surgery.

That is not to say that alternative energy sources can’t reasonably be found. It must be done with reason and intelligence and it’s going to take some time. In that pursuit, there must be alternatives for people to keep the lights on and stay warm in the winter. Common sense is desperately needed. The Biden administration has demonized the entire oil and gas industry and yet still expect investment dollars to flow in.

Biden says America is back in the war on climate change but just look at the mess that we’re seeing in Europe. One of the reasons we’re in better shape than Europe is because we didn’t make the rash kind of decisions that Europe has made the last eight years. It appears Biden will, based on his track record, continue to make the wrong decisions and that means there’s still a significant upside risk to the price of oil and natural gas.

Tonight we get the American Petroleum Institute supply report. The expectations are that we should see a modest drawdown in crude supplies of about a million barrels or more. Still, data after hurricanes are erratic and there may be some skew in the numbers as far as product supplies such as gasoline and distillates. There are variations of guesses but I’m assuming we’re going to see draws of about 2,000,000 barrels in each category.

We expect also to see the market be well supported on breaks. For months we’ve been warning about this potential energy crisis and it’s here. We’ve been telling people to get hedged because of this upside risk. It’s happening whether it be propane, natural gas, oil, gasoline, diesel.

We are in a situation where supplies are going to be tight. They are going to continue to be tight all winter. Weather is going to be a major factor. If we get colder than normal temperatures, this market could explode to the upside again. It’s better to be safe than sorry. Try to find ways to get hedged for this winter. If old man winter shows up in December, you’re gonna be thankful that you did.