Tag: markets

Out With The Old, In With The New

It was a big, and historic, week in this country as the 46th President of the United States, Joseph Robinette Biden Jr., was ushered into the White House. It was also a week that rocked the oil and gas industry. On his first day in office, Biden signed a series of executive orders that underscored his Clean Energy Revolution — rejoining the Paris Climate Accord; revoking approval of the Keystone XL oil pipeline from Canada; blocking drilling in the Alaskan National Wildlife Refuge; and telling agencies to immediately review dozens of Trump-era rules on science, the environment, and public health. In addition, on his second day in office, the Biden administration announced a 60-day suspension of new oil and gas leasing and drilling permits for U.S. lands and waters. Ironically, Biden’s cancellation of the Keystone XL project comes just days after the owners of the pipeline, TC Energy, announced their commitment to become the first pipeline to be fully powered by renewable energy; delivering affordable, reliable energy resources we all rely upon.

2021 Hedging Forecast

The recent and dramatic decline in the price of oil illustrates the risk every oil and gas producer faces with energy commodity price volatility. Although depressed prices forced operators to shut-in production to save their bottom lines, companies with hedges were left in a much better position than those who had forgone the option to reduce the impact of unanticipated revenue declines. Without the protection of an effective hedging program, an upstream company’s cash flows are wholly subject to the volatility of the market. Luckily, with upward price projections for the coming year, institutions distributing hedges to major oil companies for a portion of anticipated production may see greater returns than recent years, most certainly greater than 2020. As the story of 2021 continues to show upward crude price projections, it will be important to keep a close eye on which companies choose to hedge early for guaranteed revenue protection and those that hold out or hold off in hopes of a better tomorrow.

The Roadmap For A Clean Energy Transition

Progress towards global decarbonization is quickly becoming one of the hottest topics in 2021 following the momentum experienced in 2020. Dozens of countries, multitudes of cities, and countless companies have announced their goals to achieve net-zero emissions on their path towards decarbonization by mid-century. The problem is, most of these announcements lack any specific path forward. As a part of this movement, the International Energy Agency announced that it will produce the world’s first comprehensive roadmap for the energy sector to reach net-zero emissions by 2050 as it further strengthens its leadership role in global clean energy transitions. But is the world prepared for such a transition as the clean energy infrastructure is clearly not yet capable of supplying reliable energy on a global scale as seen in the recent blackouts in China and California?

Driving Away Investors

E&P companies have driven away investors in the energy sector by not delivering returns amongst a global pursuit for decarbonization. While investor disenchantment within the United States oil industry isn’t new, it appears to have worsened with the COVID-19 market environment. From 2015 to 2016 at the start of the “lower-for-longer” downturn, the market seemed optimistic about the industry. By 2020, the double impact of the global pandemic and the Russia/Saudi price war seems to have led many investors to avoid oil stocks and as they start seeking new opportunities. Moving forward into 2021 and 2022, capital will be difficult to source until investors feel comfortable that the industry can develop resources without squandering their money again.

“Guardian Of The Industry”

After failing to come to a consensus Monday, Tuesday’s extension of the OPEC+ meeting ended at long last with a solution. The meeting saw members of the OPEC+ group agree to lift oil production by 75,000 barrels per day over January levels. But there was also a surprise twist that sent oil prices soaring. Saudi Arabia announced they would voluntarily cut an additional 1 million barrels per day in February and March above its current cuts while its OPEC+ allies get to ramp up production. “We are the guardian of this industry,” Saudi Energy Minister Prince Abdulaziz bin Salman said as he gleefully announced the cut on Tuesday. He emphasized that the decision was made unilaterally by Crown Prince Mohammad bin Salman himself. Such actions caused crude prices to jump to a 10-month high and adds stability to an ever imbalanced market.

In The Hot Seat

An iconic brand known for cold weather gear is finding itself in the hot seat after refusing to serve West Texas based Innovex Downhole Solutions. Innovex wanted to get its employees The North Face jackets with the company logo on them for Christmas. When the company reached out to The North Face, however, their request was denied based on their industry. Now, the clothing brand is in the hot seat after Innovex CEO Adam Anderson wisely pointed out to a North Face representative how essential the products of the oil and gas industry are for their business.

Moving In Opposite Directions

Last Friday, Baker Hughes reported that the number of oil rigs in the United States rose by 5 to 246 which is the highest number of rigs since mid-May. While this is welcome news for many E&P companies, the news that U.S. petroleum refining capacity has fallen to its lowest level since May 2016 has the markets in a bit of a pickle; and for good reason. With these two metrics moving in opposite directions, crude and product inventories in the United States have begun to rise at a rapid rate once again. Luckily, global demand hit a two month high after wobbling in November when several European nations imposed fresh lockdowns and experts expect this trend to continue as demand for gasoline and diesel is accelerating once again.

Moves Of Progress

After much debate, the OPEC+ group finally reached an agreement on oil production for next year. Or at least for January. On Thursday, OPEC and its allies agreed to slightly ease their deep oil output cuts from January by 500,000 barrels per day but failed to find a compromise on a broader and longer term policy for the rest of next year. The increase means the group would move to cutting production by 7.2 million bpd, or 7% of global demand from January, compared with current cuts of 7.7 million bpd. While this is not quite the result the world was looking for, at least it is steps in the right direction.

Opinion Piece: How Will OPEC+ Respond?

There is no denying global oil demand is on the rebound, and unfortunately it may be slowed by a new round of lockdowns gripping the United States and Europe from a second wave of the global pandemic. Even though many countries in the OPEC+ group rely on oil revenues to support their national economies, RARE PETRO anticipates they will most likely continue overall production cuts instead of boosting output in January. Regardless of whether or not the current production cuts of 7.7 MMBPD are extended, any move by OPEC+ to keep cuts above 5.8 MMBPD beyond January should be received favorably by the market and may give oil prices additional upward momentum.

Survival Of The Fittest

Despite boasting the lowest lifting costs in the world at $2.80, even Saudi Arabia is struggling in this low price environment. In fact, Saudi Aramco was forced to raise $8 billion from the sale of U.S. dollar-denominated bonds to meet a dividend pledge to their shareholders. Earlier this month, the company posted a 45% fall in net income for the third quarter, generating free cash flow of only $12.4 billion, compared with the roughly $18.75 billion it requires each three months to meet its dividend pledge.

Delayed Recovery

For yet another month, OPEC revised its expectations for global oil demand as the renewed spike in coronavirus cases in major economies is slowing down demand recovery. The group now sees global oil demand at slightly above 90.0 million barrels per day this year, down by 9.8 million bpd compared to 2019. As a result, talks between OPEC and its allies are zeroing in on a delay to next year’s planned oil-output increase of three to six months, according to several delegates as they think twice about easing cuts in January.

Energy Sector Woes

The energy sector has emerged as the worst-performing of the United States eleven market sectors in the current year, dropping to its lowest point relative to the S&P 500 since 1931. In fact, not only is the oil and gas industry the biggest market loser of 2020, but it has also now become the worst performer on the market ever. Over the past 20 years, the S&P 500 has risen more than 130% while the XLE energy ETF has fallen 3%. Things need to start changing quickly if there is any hope for the energy sector.

Bullish Natural Gas Markets

A highly contested election, global pandemic, and historically low oil prices have grabbed headlines in recent months but there has been little focus on the surging natural gas market. In recent weeks, natural gas rose to prices not experienced in over a year and a half when the Henry Hub gas benchmark climbed to a 19-month high in late October. With a cold winter ahead, a historic Hurricane season in full swing, depressed oil production, and soaring LNG exports; the gas futures market remains strong and will maintain its upward momentum into the foreseeable future.

Some Will Win, Some Will Lose

In a spooky week in oil, Third Quarter results were released for some of the worlds largest and most powerful oil and gas companies and there were some surprising results. Low prices, reduced production, and slashed operating costs forced companies like ExxonMobil and Chevron to report massive losses while others like Shell and BP surprised investors and the world by turning a profit during a tumultuous third quarter.

Consolidation Is Key

This week, two major U.S. shale acquisitions were officially announced when ConocoPhillips announced their acquisition of Concho Resources and Pioneer Natural Resources announced their agreement to acquire Parsley Energy. The Pioneer all-stock transaction valued at $4.5 Billion (inclusive of Parsley’s debt increases the value to $7.6 Billion) is significantly less than the all-stock transaction of the ConocoPhillips deal valued at $9.7 Billion (inclusive of Concho’s debt increases the value to $13.3 Billion) but is significant nonetheless. Major moves in the U.S. oil and gas sector indicate that consolidation is the future.

Heating Up

A wild week in oil news saw some of the world’s top analytics firms’ predictions on the future of the oil and gas industry in the United States be overshadowed by the possibility of a massive merger between two shale powerhouses and approval of an expansion for the Dakota Access Pipeline. As temperatures begin to cool off into the winter season, election season is causing the oil industry to heat up.