Oil & Gas - Energy - Commodities - Resources (OILBRENT)

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Border Security. The Energy Report
By: Phil Flynn | February 16, 2024

Big news! Finally, they are taking steps to secure the border and building fortified enclosures and making contingency plans to deal with an influx of refugees. Oh no, not our borders but in Egypt. Oil prices surged as a pathetic retail sales report put rate cuts back on the table and geopolitical risk concerns started to creep back into the price of oil and products. Dow Jones U.S. retail sales fell a seasonally adjusted 0.8% in January from a month earlier, the Commerce Department said Thursday. The larger-than-expected loss came after a strong round of holiday shopping in December, which the report revised to a 0.4% gain. Excluding autos, sales were down 0.6%; economists expected an increase.

This comes as the International Energy Agency and OPEC continue to have different outlooks for demand growth as the US process starts to cut rigs and major players are killing environment, social, and governance (ESG) policies before it kills them. The FT is reporting that, “Two of the world’s biggest asset managers are quitting an investor group set up to prod companies over global warming and a third is scaling back its participation, in a major setback to the ambitions of Climate Action 100+. JPMorgan Asset Management and State Street Global Advisors both confirmed they were leaving Climate Action 100+. BlackRock, the world’s largest money manager, is pulling out as a corporate member and transferring its participation to its smaller international arm.” OPEC is tightening the screws and even the cheaters are vowing compensation. Iraq and Kazakhstan vowed that they would cut overproduction over the coming 4 months. Israel is on the offensive and the AP reports that Russia’s prison agency says that imprisoned opposition leader Alexei Navalny has died. He was 47. The mingling of all these factors along with our belief that this will cause demand to outstrip supply sets up a very bullish outlook for oil and products.

Let’s start with the US supply outlook. John Kemp at Reuters points out that the WTI squeeze is on. Kemp writes that, “U.S. crude futures show increasing signs of a squeeze on inventories around the NYMEX delivery point at Cushing in Oklahoma. The calendar spread from March to April 2024 has surged in the run-up to next week’s expiry of the March contract. We are also seeing reports that standard charter JP Morgan as saying that we need to see Brent crude above $90.00 a barrel to reflect the actual fundamentals of the market. Standard Charter for one has said that we still have to see prices go a lot higher to accurately reflect the rapid tightening of the market as well as the recent escalation of geopolitical risk. This comes since we pointed out yesterday that while the International Energy Agency continues to downplay global demand, they have acknowledged that the global supply side is the tightest it’s been in many years. “Global observed oil stocks plummeted by about 60 mb in January, preliminary data indicate, with on-land inventories falling to their lowest level since at least 2016” according to IEA.

While U.S. oil supply surged this week, Cushing didn’t benefit even with the refining issues in Whiting IN and seasonal maintenance. U.S. oil production seems to be leveling off and it’s a possibility that we have peaked for U.S. oil production. Even Occidental Petroleum, which had awesome earnings, said they plan to not increase production and cut two Permian Basin rigs as well as Cap X.

Seeking Alpha said that OXY Q4 production ticked up ~7K boe/day from the year-earlier quarter to 1.234M boe/day, exceeding the midpoint of company guidance by 8K boe/day, but the average realized price for oil fell by ~2% Y/Y to $78.85/bbl; Q4 production from the Permian Basin rose 4.1% Y/Y to 588K boe/day. Occidental (OXY) said it will trim capital spending in shale and exploration by ~$320M this year and idle two rigs in the Permian Basin, citing “efficiency and moderating activity,” while increasing capex in the Gulf of Mexico, chemicals, and the enhanced oil recovery business.

US producers are cutting back based upon plunging natural gas prices and the lesson learned that has given them fiscal discipline along with mixed signals from the Biden administration that have been hostile to the US oil and gas industry and US oil and gas workers. Scott Disavino at Reuters writes that, “U.S. natural gas producers are slashing spending and reducing drilling activity following a sharp decline in prices, companies said this week during earnings presentations and analyst calls. For months of relatively low gas prices, many producers kept output mostly steady on expectations that demand would rise in 2024 and 2025 when several liquefied natural gas (LNG) export plants entered service. However, this week’s collapse in gas prices to a 3-1/2-year low convinced some drillers to reverse course.

The Biden administration’s politicization of LNG exports is the best hope for the globe to reduce greenhouse gas emissions unless we build a lot of nuclear power plants and it did get some pushback from the US House of Representatives. Reuters reported that, “A bill to strip the power of President Joe Biden’s administration to freeze approvals of liquefied natural gas exports passed in the Republican-controlled U.S. House of Representatives on Thursday, but faces an uphill battle in the Senate. The House approved the bill sponsored by Representative August Pfluger of gas-producing Texas 224-200 on a mostly party-line vote. The legislation needs to be passed in the Democratic-controlled Senate and signed by Biden to become law, both of which are unlikely.

The markets are pulling back because we were a bit overbought. The key today will be the inflation data and the concerns about geopolitical risk going into the weekend. For natural gas, the pain is going to be felt by many producers and we will see many start to go out of business and put pressure on the banks that loan them money. The the seeds are being sewn for a bottom and the cutback in production but with strong oil prices, it might not happen as fast as people think. In the meantime, make sure that you are hedged just in case. Natural gas options are cheap and by next year prices should look a lot better for oil and gasoline and diesel we think there’s still significant upside risk.

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