As an energy industry participant, investor, lover and hater I spend a lot of my time immersed in the minutiae of the energy industry, the oil price, its movements, the price of natural gas and its irrational gyrations and all the factors that push and pull these magnificent commodities in often infuriating and counter-intuitive directions on a daily if not hourly basis.
It is not uncommon for my business partner to have to turn off BNN because I am unhingedly yelling at yet another of the procession of talking heads they bring on to discuss the energy sector and pontificate and theorize why the price of oil is headed to $40 or $140. Sometimes I even yell at Twitter (I will never be able to call it X) and I have such faith in oil price rationality that the oil and gas portion of my portfolio is called “Stu’s Portfolio of Doom”.
Regardless, the oil price is, as always, interesting. And with the price of oil briefly breaching $90 for the first time since last November on Thursday afternoon, it feels topical and in fact necessary to unpack what exactly the heck is going on. And what might be next.
A lot of people like to use the terms “bearish” and “bullish”. They are indeed handy market terms, but their connotation is largely a positive vs negative one while in the case of oil and natural gas, low prices are actually just as good as high prices, but for different parties.
So what I really want to do is look at the factors that can push prices higher and compare them to the factors that can pull prices lower. At some point there must be equilibrium, right? Right? A sweet spot? A place where there is tension but stasis. I’ve said this before – it’s more the push me-pull you from Doctor Doolittle instead of the bull and bear of traditional markets.
Here are, in my view, the top factors affecting oil prices in the current environment and an assessment (guess really) whether that factor is likely to either push prices up or pull prices down. I may even, if you’re lucky, opine on which is in the ascendancy. We’ll just have to see on that one.
Note that if you are expecting a deep dive on data you are in the wrong place, I’m all about the qualitative today.
OPEC
OPEC, plus or otherwise, or as I like to call it “Saudi Arabia and quasi-friends” is, as always, the largest single influence on the price of oil. They control close to 30% of production and have the ability to either flood the market with product to squeeze competitors out or withhold exports to force prices up. In the current pricing environment, Saudi Arabia and its partners are very much enjoying the elevated prices as it is allowing them to pursue the many absurd projects they have on the go. In past years, OPEC+ has been assiduously raising each member’s quota to ensure a stable amount of supply for the world and offset rising prices. Ironically, they have consistently failed to collectively and individually hit their quotas which has led many to opine that the myth of OPEC spare capacity is indeed a myth. That said, they have now voluntarily withdrawn about 5 million barrels a day from the market and have the capability to dial things back if the market gets too overheated.
Push/Pull Rating? It’s always about OPEC. Currently pushing prices up, until they decide to pull them down.
Russia
Ah Russia. What the actual F are you doing. Russia is in the top three producers of oil in the world, behind only the Untied States and Saudi Arabia. Since the invasion of Ukraine, Russian oil production and exports have suffered. Estimates range between 500,000 and 2 million barrels per day but the data is sketchy. If we are to judge by the direction of prices, the market thinks a lot more barrels are leaking into market than sanctioning governments hoped for. Many of these barrels are going to China and India but a fair amount are backdooring their way into Europe via ship transfers. Barring any significant movement in the Ukraine invasion or a giant spine growing in the EU, it is increasingly feeling like “this is the way it is going to be”. Russia sells what it can to whoever wants it, Europe gets its share, the USA rolls its eyes and looks the other way. There is now a price cap and Russia continues to sell the same volumes, just to someone else.
Push/Pull Rating? Russian barrels are technically a pull on oil prices if only because of the price cap.
Iran
Iran is constantly in the news these days with the imminent renewal of the JCPOA being used as a major White House talking point to fool the markets into thinking we are about to see a flood if Iranian barrels imminently enter the market. Meanwhile, Iran is selling drones to Russia to assist its war efforts and continues to sponsor terrorists and militias in locations ranging from Lebanon to Syria to Iraq. Recently we have learned that any deal with Iran is not imminent at all and that their demands continue to change and they are bad faith negotiators. Go figure. Word to the market: Stop it. The barrels that you think are imminently flooding the market aren’t and besides, Iran is already exporting oil in defiance of poorly enforced sanctions to countries that don’t care about sanctions and just want oil. Who? Well China and India among others. And it will cost literal billions of dollars and years to get its market up to the point people assume would happen on any deal. Plus they are part of OPEC and are probably enjoying all the money they are currently raking in. Do you really think Iran is going to flood the market?
Push/Pull Rating: Stuck in the Middle (east) with you
North American Production
In 2007-2008, the last time energy prices went bananas, the shale revolution rode to the rescue with cheap and abundant natural gas being extracted in economy saving amounts from porous rocks from Texas to Arkansas to Pennsylvania while similar technology was used to suck billions of barrels of super light crude from horizontal seams across Texas, North Dakota and Canada. At the same time, the largest infrastructure spending frenzy ever seen in Canada took the oilsands from expensive curiosity to low decline factory style mega output. In the 2010’s the majority of oil production growth came from the United States and most of the balance came from Canada. In today’s price and physical environment that type of growth is impossible. I don’t care what anyone says. There isn’t enough money or will. The billions have been spent – in many cases vaporized and producers are in harvest mode. Even if the impetus was there, the manpower isn’t and I am unconvinced the resource is there for significant growth, except the oilsands. Sure US production is at an all-time high but the days of 10%-25% rapid growth aren’t. So incremental growth is going to be the order of the day. Reserve replacement. Managing depletion. Offsetting declines. Anyone waiting for North America to once again draw the attention of Saudi Arabia and OPEC, causing them to sewer the market and bankrupt an industry will have to wait. We can do that all on our own, thank you very much.
Push/Pull Rating. Producers are laughing all the way to the bank doing the bare minimum. Pull.
EU and UK economies
The rise in energy prices across the European Union and the United Kingdom has created a crisis that could have lasting repercussions for decades. Whether it’s the fear of (and in Germany actual) de-industrialization across the continent, or the return of the feudal system as the peasants gather around the few energy rich duchies and burn wood to heat their homes and cook their pigeons, the direction of the European economies should be of major concern right about now. Fortunately, there will be no need for a Marshall Plan version 2.0, but with interest rates rising, anemic growth and a lot of inflation, Europe I think is in for a rough go. Energy policies and subsidies to reduce the burden on energy users are fine, as are efforts to secure enough storage of natural gas to last the winter, but that just means that Europe is one cold snap away from blackouts. Europe is rediscovering that it needs cheap energy now to save its economy. Renewables, bless their hearts, are going to take too long. Natural gas and LNG is really the bridge and a lot could be accomplished if Germany just turned their nuclear plants back on. I guess they are stuck waiting until 2025 when newly elected PM Pierre Poilievre of Canada will personally pilot the first LNG tanker across the Atlantic to Germany – business case be damned. Ironically in the UK the prospects are not as dire because the last few years of Brexit buffoonery have already battered the economy into submission so there is really nowhere to go but up as long as they can source the cheap energy they need. It is also reassuring that after the Johnson/Truss fiasco they have a prime minister who seems on the surface at least to be both competent and normal.
Push/Pull Rating. It could get ugly – definite Push
Interest rates and Inflation
Central banks across the globe are determined to crush inflation and nowhere is that being telegraphed more specifically that in the United States. Whether it’s a soft or a crash landing the reality is that central bank policy makers really don’t care that much how they get there, as long as people stop spending. Period. Interest rates have run to 5%? Will the Fed see a need to run higher? Depends on the direction of inflation and will be independent of the economic effect. CPI growth in the US this past month was the highest since the pandemic and certainly during this inflationary cycle – oops! My own personal view is that the rate increases are done for now and will remain around where we are as a new normal for a long time. There is no stimulus coming. The US economy refuses to materially slow and employment growth continues. Demand for energy continues to grow. At some point this will end, but it’s taking a long time. That said, as they say – never bet against the Fed.
Push/Pull Rating: Short term Push, long term Pull.
US Presidential Election
This has very little bearing on oil prices in the short or long term, but I couldn’t let the opportunity pass to point out, yet again, that in 2024 there will be an election fought between a twice-impeached, 91-time indicted 75 year old orange reality star and an octogenarian, one-time attempted to be impeached father of a federally indicted wayward recovering drug addict son who may or may have tried to trade his dad’s good name and position for personal gain.
Sheesh.
Push/Pull Rating: None. What a gong show.
Strategic Petroleum Reserve
The American Strategic Petroleum Reserve, located in the Canadian province of Alberta, has long been the security blanket the United States has needed to offset the inevitable oil shocks that come from an energy complex that relies on garbage dictatorships and theocracies like Russia, Saudi Arabia and Iran to maintain affordability. What? Am I saying the quiet part out loud? Okay fine. Look everyone knows that the Biden administration callously used the Strategic Petroleum Reserves for political purposes, authorizing the release of 180 million barrels of oil over 180 days last year in a desperate attempt to push gas prices down and save their electoral bacon. Many analysts, myself included, thought this was dumb and inappropriate use of the reserve, wouldn’t work and would just lead to higher prices when the SPR needed to be refilled. We were only partly right. It was inappropriate. Aside from that – it was political genius, worked to lower prices and the Biden administration never intended to refill the SPR and create artificial demand. Unfortunately OPEC made this moot with their dialling back of production – it is now too expensive to refill, so I guess we’re back to the oil sands as SPR argument – so the US can continue to put subsidized solar panels and windmills all over the country, secure in the knowledge that Danielle Smith has their back. How reassuring is that?
Push/Pull Rating: Middle. The effect has come and gone and now it’s just a smaller reserve.
Rest of World Production.
Mexico? Declining. Africa? Years away and barely material. South America? Brazil always disappoints. Colombia now exports more $$ value of cocaine than oil. The rest are minor players. Meh.
Push/Pull Rank? Does anyone have any real money to spend on exploration? Push on prices.
Renewables and electrification
The ongoing electrification of everything in the world and the advent of electric vehicles is of course an unstoppable force (as long as battery tech keeps improving and, well, we can still get all the cheap minerals needed to make said batteries). And I am in no position to say it isn’t going to happen, particularly since I keep pretending I am in the market for one of these so-called zero emission vehicles. In addition, the relentless expansion of solar and wind energy will surely change the generation mix from 80% fossil fuel and 20% renewable to something closer to 75% fossil fuel and 25% renewable sometime around 2050 if not sooner. So, the writing is on the wall for energy dense, cheap and abundant fossil fuels. Who needs to burn oil and gas when there is the sun, the wind and the forests to generate heat and electricity. Look, I’m being tongue in cheek. As long as governments are willing to spend the trillions required to upgrade the grid around the world, I am just fine with companies building as much renewable generation as possible, especially if it is subsidized and I don’t have to pay for it… directly. The long and short of it of course is that eventually, some of the cheap, yet dirty, energy dense power from fossil fuels will be replaced. If it’s from acres and acres of landscape destroying solar and super expensive batteries, so be it. I am down for that. But in the meantime, that pesky 80/20 world prevails.
Push/Pull Rating: Still not ready for top billing – it’s a push for oil prices.
Ch-Ch-Ch-China
Last on the list and a veritable elephant in the room. China, for want of a better term, has been a pain in the ass for energy markets for the better part of the last two years. What they do going forward matters for the energy industry, both oil and gas. The largest investor in renewable energy in the world is also the largest emitter of CO2 and the largest and fastest growing consumer of coal. In addition, they are also buying all the Russian, Iranian and US oil they can to fill their own Strategic Petroleum Reserves and the economy, notwithstanding the evisceration of the property sector, is still poised to grow by a disappointing 5% to 6% this year.
Push/Pull Rating: It’s a Push, verging on a shove.
In conclusion…
As always, I think it is apparent from the preceding where I sit. There are contrarian forces pushing and pulling the market all over the place, which is leading to the disproportionate volatility. On balance though, I think the “push” of scarcity, energy insecurity, continued demand growth in emerging economies and the time to transition “trumps” the downward pull of Russia and Iranian supply, the ongoing electrification of the global economy, recession panic and a bunch of OPEC spare capacity sitting on the sidelines ready to flood the market at the drop of a hat.
Prices may not be headed much higher, but there is no catalyst to drop them.
Which I guess for the short term makes it bullish for me.
I like high prices, so does my portfolio of doom.
