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.
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?
“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.
Delayed Bull Run
In this week’s episode of the Periodical Podcast, your hosts Kevin and Tavis revisit our predictions made in early November after natural gas prices soared to a 19-month high. After
Natural Gas Update – The Delayed Bull Market
At the end of October, natural gas prices soared to a 19-month high and after such impressive upward price movements, the RARE PETRO team predicted prices would sustain prices near the $3 per MMBtu range for the final months of 2020 and into 2021. With a cold winter ahead, a historic Hurricane season in full swing, depressed oil production, and soaring LNG exports; the gas futures market appeared to have plenty of price support to maintain its upward momentum into the foreseeable future. Unfortunately, the final months of 2020 were fairly lackluster for the surging gas market but luckily, the new year brings new hope for the struggling sector.
Falling Short of Demand
The year 2020 has certainly been a wild one in all aspects of both society and the global economy, but has also left the global petroleum industry in disarray. When global oil demand eventually returns to pre-pandemic levels and ultimately continues to grow, will the world have enough crude to meet demand for the upward trajectory of energy consumption? According to Rystad Energy, the answer is no. They predict the world is on track to run out of sufficient oil supplies to meet its needs through 2050, despite lower future demand due to the COVID-19 pandemic and the accelerating energy transition. There may not be enough supply in the next 30 years unless exploration speeds up significantly and exploratory capital expenditures of at least $3 trillion is put to the task.
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.
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.
The Energy Transition
As the world continues to consume more and more energy, a sustainable energy source is needed to meet growing demand. As climate change continues to be a hot topic, the world has begun “the energy transition.” This refers to the energy sector’s shift from a fossil-fuel based system of energy production and consumption, namely crude oil, natural gas, and coal, to renewable energy sources like wind, solar, and lithium-ion batteries. As the world continues down this path, it becomes clear that the energy transition should gradually shift allocation for the leading source of power in a cumulative energy mix, and to pursue a single source of energy for the globe is not only foolish but irresponsible.
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.
Battle Of The Bigs
Chevron Corporation overtook Exxon Mobil Corporation as the largest oil company in America by market value, the first time the Texas-based giant has been dethroned since it began as Standard Oil more than a century ago. But neither are any match for a Hurricane as both majors have evacuated production platforms in the Gulf of Mexico ahead of Hurricane Delta. The Bureau of Safety and Environmental Enforcement estimated about 80% of the Gulf’s oil production and 49% of natural gas production has been shut-in, including over 180 production platforms. Hurricane season has chronically caused trouble in the gulf region and a historic 2020 is no different.
You Can’t Change The Past
On Thursday, news headlines read “Oil Prices Slide As OPEC Opens The Valves” which referenced the overall increase in OPEC production for the month of September. Yet only 3 of the past 14 weeks has the EIA reported domestic crude oil inventory builds. In the month of September alone, there was a total of 10.989 million barrels of crude oil drained from domestic inventories and yet when news breaks that OPEC increased production during September, when global inventories fell at historic rates, current prices dropped. Seriously?!? Market participants are reacting to something that happened in the past without paying attention to the actual supply/demand picture.
Gavin’s Gamble
This week, California Governor Gavin Newsom announced California will phase out the sale of all gasoline-powered vehicles by 2035 in a bid to lead the U.S. in reducing greenhouse gas emissions by encouraging the state’s drivers to switch to electric cars. As California pushes to phase out hydrocarbons and make the switch to renewable energy sources, they have experienced electricity shortages that have left hundreds of thousands of customers without power. So, how does the state expect to power all the homes AND vehicles in the state within the next 15 years without reliable power?