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An Oil Supply Shock May Be Imminent

An Oil Supply Shock May Be Imminent

  • Oil demand has remained resilient in the face of a multitude of challenges.
  • OPEC+ has fallen behind more than 3.5 million bpd on its output goals.
  • The DoE has no immediate plans to start refilling the SPR.
  • The risk of a supply shock grows as China’s economy re-opens while Russian oil is being forced off the market.

When the chief executive of Aramco said earlier this week that years of underinvestment had damaged the balance between supply and demand in the oil market, it should have been a wake-up call to those in decision-making positions. Instead, the secretary-general of the UN bashed the oil industry once again for “feasting” on record-high profits and urged governments to make them pay for this.

Meanwhile, OPEC’s production shortfall last month reached 3.58 million bpd—a figure equal to some 3.5 percent of global demand—and the United States continued to sell oil from its strategic petroleum reserve.

These seemingly unrelated news reports do have something very important in common. Both clearly suggest a supply shortfall on a global level is imminent. Throw in the news that Russia’s oil exports could fall by some 2.4 million bpd after the EU embargo enters into effect in December, and an oil shortage becomes more or less unavoidable.

Oil demand has remained resilient in the face of a multitude of challenges, and even prices of over $100 per barrel failed to curb it in any significant way earlier this year. Now, prices are somewhat tempered, but the embargo is still about two months away. Once this kicks in, prices are bound to jump because alternative supply is limited. And the U.S. will need to start refilling its SPR at some point because it is getting depleted.

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Paradigm Shift: End of the Oil Age

The world thinks it’s in an energy crisis today and indeed there are shortages in some places but the world is undergoing an energy crisis more fundamental than the simple shortage happening today in Europe. A shortage can be remedied.

The larger problem is that oil use began to decline from 48% of total world energy consumption after 1977 (Figure 1). This was the beginning of the end of the oil age.

Figure 1. The end of the oil age began with the price shocks of the 1970s. Oil consumption has fallen from 48% to 36% of total energy use since 1977. Source: EIA, BLS & Labyrinth Consulting Services, Inc.

 

Per-capita oil consumption has been flat since since 1985 (Figure 2). That means that individual worker productivity is not growing as it did before the oil shocks.

Figure 2. World per-capita oil consumption reached a peak in 1978 and has been on an undulating plateau since 1985. Source: EIA,FRED, OWID, BP & Labyrinth Consulting Services.

The world thinks that an energy transition is underway but fails to understand that transitions are additive. The relative percent of fuels changes but volumes rarely decrease. The world uses, for example, as much biomass today as in 1800 (Figure 3). Nor is there any likelihood that this transition will take 30 years instead of the century or longer period for earlier transitions.

Figure 3. Energy transitions are additive. The relative percent of fuels changes but volumes rarely decrease. The world uses as much biomass today as in 1800. Source: EIA, BP, IEA, FRED, OWWD, World Bank & Labyrinth Consulting Services, Inc.

The real crisis today is that oil is the economy. The oil age has been ending for 50 years but there is no substitute for oil. Wind, solar and nuclear only address electric power generation which accounts for only 18% of world energy consumption…

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Saudi Aramco to increase oil production to meet global demand

Saudi Arabia’s state oil company said it would increase spending on oil production to meet rising global demand, as it reported a doubling of profits in 2021.Photograph: Ahmed Jadallah/Reuters© Provided by The Guardian Photograph: Ahmed Jadallah/ReutersSaudi Aramco – the world’s largest oil exporter and one of the world’s most profitable companies – said its net profit increased by 124% to $110bn (£83bn) in 2021, compared with $49bn a year earlier.

The company said its profits had soared as a result of higher crude oil prices as demand for oil rebounded after the pandemic, and also because of increased margins for its refining and chemicals business.

Brent crude oil rocketed to $139 a barrel, a 14-year high, earlier this month but have since dropped to closer to $100. In early December, a barrel of crude was priced below $70.

Aramco expects demand for oil to keep climbing, and said “substantial new investment” is required to meet this demand, in a move likely to dismay climate campaigners.

It said it is increasing its capital expenditure for 2022 by about half to between $40 and $50bn, with further growth expected until the middle of the decade.

The state-owned oil firm’s capital expenditure came in just below $32bn in 2021, an 18% increase from 2020.

Saudi Arabia and the United Arab Emirates have been asked in recent days by western governments to pump more oil to replace reliance on supplies from Russia.

The Gulf countries are the only two leading oil producers that have immediate spare capacity able to offset the shortfall in Russian-produced energy. However, the International Energy Agency (IEA) said in a recent report that Saudi Arabia and the UAE are so far “showing no willingness to tap into reserves”.

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IEA calls for driving restrictions and air travel curbs to reduce oil demand

IEA calls for driving restrictions and air travel curbs to reduce oil demand

Energy agency warns 2.5mn barrels a day of Russian oil exports could cease from next month

The International Energy Agency has called for member countries to adopt “emergency measures” to cut oil demand in the wake of Russia’s invasion of Ukraine, including driving restrictions, lower speed limits and curbs on air travel.

Fatih Birol, head of the energy watchdog, on Friday warned that such steps might be necessary because “oil markets are in an emergency situation . . . and it may get worse”.

As much as 2.5mn barrels a day of Russian oil exports could cease from next month due to the impact of the war and consumer boycotts of Russian crude, he said. Russia is one of the world’s largest oil producers. The IEA has proposed 10 measures to reduce oil demand by 2.7m b/d within the next four months, which it said would help balance potential loss from the Russian market. “As a result of Russia’s appalling aggression against Ukraine, the world may well be facing its biggest oil supply shock in decades,” Birol said. He urged IEA member countries — which include many of the world’s largest energy consumers such as the US, Japan and Germany — to cut demand now, “to avoid the risk of a crippling oil crunch”.

The measures include cutting speed limits on highways by 10kph, which would save 430,000 b/d, reducing business air travel and taking trains instead of planes where possible.

Working from home three days a week would also help cut oil demand, along with making public transport cheaper or even free. Many of the proposals would cut down on driving, including banning private cars from cities on Sundays and limiting private car access to roads in large cities.

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Oil Producers Aren’t Keeping Up With Demand, Causing Prices to Stay High

OPEC Plus, the United States and others have been slow to ramp up output, lagging production goals.

An oil refinery in Port Arthur, Texas. Lagging production of oil worldwide has been sending prices to seven-year highs and driving inflation.
Credit…Brandon Thibodeaux for The New York Times

Nearly two years ago the world’s oil producers slammed on the brakes and drastically cut production as the pandemic gripped the world’s economies. The sharp pullback came with an implicit promise that as factories reopened and planes returned to the air, the oil industry would revive, too, gradually scaling up production to help economies return to prepandemic health.

It isn’t exactly turning out that way. Oil producers are finding it harder than expected to ramp up output. Members of the cartel OPEC Plus, which agreed to cut output by about 10 million barrels a day in early 2020, are routinely falling well short of their rising monthly production targets.

“In a lot of places, once output has been reduced, it is not easy to bring it back,” said Richard Bronze, the head of geopolitics at Energy Aspects, a London-based research firm.

Production in the United States, the world’s largest oil producer, has also been slow to recover from its one-million-barrel-a-day plummet in 2020, as companies and investors are wary of committing money amid climate change concerns and volatile prices. The Energy Information Administration forecasts that U.S. crude output in 2022, while rising, is likely to average half a million barrels a day below 2019 levels.

This global pattern of lagging production has helped push oil prices to seven-year highs, stoking inflation, which has become a political issue in the United States and elsewhere. Brent crude, the international standard, is close to $84 a barrel, while West Texas Intermediate, the American benchmark, is selling for close to $82.

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Energy demand rises, challenging climate goals

Energy demand rises, challenging climate goals

Rebound to push oil appetite above pre-pandemic levels, Moody’s says

oil pump
iStockphoto.com / baona

Despite new government commitments to reduce greenhouse gas emissions, fossil fuel demand is set to surpass pre-pandemic levels, says Moody’s Investors Service.

In a new report, the rating agency said it expects demand for energy to continue its recovery in 2022, with strong consumer appetite for gasoline and resurgent international travel driving an increase in demand for oil that is predicted to exceed its pre-pandemic mark.

This resurgence in fossil fuel demand is running up against efforts to combat climate change by curbing emissions, the report noted.

“New COP-26 commitments provide momentum for accelerated decarbonization, but increased demand for oil and natural gas poses a stubborn impediment to progress,” it said.

In turn, this could could drive greater policy action, the report suggested, as increased emissions due to rising oil consumption “will likely lead to added investor pressure for oil companies to transition their businesses, and to inspire more policy initiatives to cut oil and gas demand.”

Moody’s said that the oil and gas industry’s efforts to combat emissions will include switching to renewable energy, along with “a new focus on developing technologies to generate low-carbon energy sources.”

“Companies are exploring technologies to generate less carbon-intensive fossil fuel, and technologies that offset [emissions],” it said. “But the commercial viability of even the most promising low-carbon technologies appears uncertain without regulatory support or subsidies.”

In the meantime, the strong demand for energy and uncertainty about the prospect of expanding supply will keep prices high, Moody’s said.

It expects oil prices to remain at the high end of its medium-term range of US$50-US$70/barrel, and that natural gas prices will stay high too, “as the global industry resolves significant ongoing dislocations.”

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World Economy Entering Period of Oil Scarcity, Halliburton CEO Says

World Economy Entering Period of Oil Scarcity, Halliburton CEO Says

Jeff Miller warns that global oil supply could soon be surpassed by demand for the indefinite future

Halliburton CEO and president Jeff Miller made waves on Monday predicting that the world is due for a period of oil scarcity in comments at the World Petroleum Congress in Houston, Texas.

“I think that for the first time in a long time, we will see a buyer looking for a barrel of oil, as opposed to a barrel of oil looking for a buyer,” Miller said.

Since 2014, the oil industry has generally deemphasized building new infrastructure in the face of low prices. However, that trend may now catch up with the industry, which now finds demand for oil exceeding the available supply given current infrastructure.

Some analysts have speculated that it is increasingly likely that oil prices will soon climb to $100 per barrel, a price unseen in the past seven years and which has serious potential to disrupt the economy.

An additional factor contributing to predicted oil scarcity is a labor shortage in the fossil fuel industry surpassing that in the general economy.

The widespread perception that fossil fuels will be marginalized in the future of energy and transportation makes long-term careers in petroleum unattractive to young workers, with many oil workers seeking to switch to renewables or leave the energy industry outright.

A recent survey revealed that 43 percent of oil industry employees sought to transition to other sectors in the next five years, as reported by Reuters.

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Running Out of Spare Capacity

Running Out of Spare Capacity

Global oil markets could not have looked grimmer than back in the summer of 2020. COVID cases were increasing again and further global economic lockdowns were being threatened. Only two months before, oil prices had crashed into negative territory for the first time in history as global inventories had surged and threatened to overflow. Between the never-ending pandemic and electric vehicles, common investment wisdom believed oil demand was in secular decline, bloated inventories would remain elevated forever, and oil prices would never recover.

At Goehring & Rozencwajg, we love to undertake in-depth insightful research that identifies newly developing investment trends and often comes up with conclusions that differ vastly from consensus opinion. Our goal is to share these results with our investment clients and partners at least twelve months before they become headline news in the financial press. This is an ambitious goal and we don’t always get it right. However, the satisfaction in recognizing trends long before the general investment community not only brings large profits to our investors, but a huge amount of professional pleasure to us as well.

To that end, we titled our 2Q2020 letter “On the Verge of an Energy Crisis”. At the time, no one agreed with us. Now headline after headline talks of an “unforeseen” energy panic. It looks like the energy crisis we discussed 14 months ago is now here.

If the energy crisis has arrived, where does Goehring & Rozencwajg see things 12 months from now? By the end of 2022, we believe global oil demand will have exceeded pumping capability for the first time in history. Just as no one agreed with our assessment of an emerging energy crisis this time last year, almost no one agrees us today either. Instead, conventional wisdom strongly believes OPEC spare capacity will be returned, eventually throwing the market into huge surplus in 2022.

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365 Days of Climate Awareness 88 – Peak Oil

365 Days of Climate Awareness 88 – Peak Oil

Too much demand causes oil prices to rise to an unsustainable level, leading to the oil market’s collapse.

This is another topic, like eutrophication, which is not specifically part of the global warming problem, but it is of direct importance to society and to our use of petroleum. Peak oil theory states that, since petroleum is a finite resource, while humanity is not in imminent danger of running out of recoverable oil, the remaining oil will be increasingly hard to obtain, requiring more time and resources, becoming a less efficient process which is increasingly not beneficial to the economy or humanity.

***

In 1956 Marion King Hubbert, a geologist for Shell Oil, was commissioned to report on future oil recovery in the United States. After a statistical study of all available oil field data, Hubbert developed a bell-curve model for conventional crude oil production predicting a peak in the early 1970’s. In fact conventional oil—wells drilled on land, without the application of advanced recovery techniques—peaked slightly before Hubbert’s prediction, topping out at 9.5 million barrels per day (mmbd). Similarly detailed information is not available for oil fields in other countries—Saudi Arabia is not about to give out detailed information about production and reserves, which would compromise its geopolitical strength, for example—so similarly detailed predictions cannot be made for the planet as a whole.

Furthermore, unconventional oil production has increasingly come to dominate the market, with offshore and fracked wells leading to new peaks in production, notably in the United States (which currently leads the world in crude oil production at slightly over 10.5 mmbd). So what to make of a theory which was correct on its initial terms—predicting maximum onshore oil production in the United States—but avoided predictions for the markets which developed later, and have led to later, higher production?

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OPEC+ Reportedly Threatening Response To Global Coordinated SPR Release

OPEC+ Reportedly Threatening Response To Global Coordinated SPR Release

In an apparent ‘threat’ response to headlines suggesting the Biden administration is attempting to coordinate a global SPR release to push down oil prices (and following reports from Japanese media that the government is preparing to release crude from its strategic stockpiles), the Riyadh-based International Energy Forum said OPEC+ may change its plan for raising oil output if consuming nations sell petroleum reserves or the coronavirus pandemic worsens.

“I anticipate OPEC+ energy ministers will maintain their current plan of adding more supplies to the market gradually,” IEF Secretary-General Joseph McMonigle said in a statement Monday after a meeting with a Japanese foreign ministry official about recent volatility in energy markets.

“However, certain unforeseen external factors such as a release of strategic reserves or new lockdowns in Europe may prompt a reassessment of market conditions.”

Critically, this confirms much of what we have written about how any coordinated SPR release (however unlikely that is in and of itself) that any increase in supply will be met by action from OPEC+ moving to not hike outputs as previously planned – thus perhaps helping prices in the short-term, but raising them longer-term.

For now, oil traders are undecided at what this news means…

For now we expect gas prices to drop in the short-term as the lag in the supply-chain from crude to the pump implies some built-in reduction…

But, if OPEC+’s threat response plays out with higher prices, those lower gas prices will prove ‘transitory’.

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BP: Oil Demand Has Already Topped 100 Million Bpd

BP: Oil Demand Has Already Topped 100 Million Bpd

  • BP: Global oil demand has already exceeded the threshold of 100 million barrels per day
  • Demand will continue to increase and reach pre-COVID levels at some point in 2022

Global oil demand has already exceeded the threshold of 100 million barrels per day (bpd) last seen before the pandemic, supermajor BP estimates.

Demand will continue to increase and reach pre-COVID levels at some point in 2022, BP’s chief financial officer Murray Auchincloss said on Tuesday at a conference call following the release of the Q3 results.

“Somewhere next year we will be above pre-Covid levels,” Auchincloss said on the call, as carried by Bloomberg.

“OPEC+ is doing a good job managing the balance, so we remain constructive on oil prices,” BP’s CFO added on the call about BP’s third-quarter results, which beat analyst estimates.

Brent Crude prices rose by 7 percent to average $74 per barrel in the third quarter and moved above $80 per barrel in recent weeks, Auchincloss said at the Q3 results presentation.

“This reflects the strong rebound in oil demand as the impact of COVID eases as well as the measured increases in OPEC+ supply. As a result, inventories have reduced back toward pre-pandemic levels. As we look ahead to the end of the year, we expect oil prices to be supported by continued inventory draw-down, with the potential for additional demand from gas to oil switching,” BP’s executive added.

BP’s view about global oil demand is generally in line with most analyst and industry estimates pointing to consumption returning to pre-pandemic levels as soon as this quarter or early next year.

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Biden says he worries that cutting oil production too fast will hurt working people

President Biden spent three days in Rome talking to world leaders before and during the G-20. He held a formal press conference before heading to the UN climate summit in Glasgow.
Brendan Smialowski/AFP via Getty Images

President Biden said on Sunday that the world can’t immediately stop using oil and said OPEC and Russia need to pump more of it, even as he pushes the world to pledge to cut climate-changing carbon emissions at the Glasgow climate summit this week.

After three days of meeting with world leaders in Rome, where he attended the G-20 summit, Biden said he is worried that surging energy costs are hurting working class families.

“On the surface it seems like an irony,” Biden said of simultaneously calling on major oil producers to pump more as he heads to the COP26 climate change summit. “But the truth of the matter is … everyone knows that idea that we’re going to be able to move to renewable energy overnight … it’s just not rational,” he said.

Biden said the idea that Russia, Saudi Arabia and other producers are holding back to boost prices “is not right.” With gas prices averaging $3.40 a gallon in the US, according to AAA, Biden said families are feeling it.

“It has profound impact on working class families just to get back and forth to work,” Biden said. He talked about the issue with other major oil-consuming countries at the G-20, but told reporters he was reluctant to reveal any of their plans to spur producers to pump more.

Twin peaks: Whether it’s supply or demand, oil era heads for crunch time

A worker collects a crude oil sample at an oil well operated by Venezuela's state oil company PDVSA in Morichal, Venezuela, July 28, 2011.  REUTERS/Carlos Garcia Rawlins

A worker collects a crude oil sample at an oil well operated by Venezuela’s state oil company PDVSA in Morichal, Venezuela, July 28, 2011. REUTERS/Carlos Garcia Rawlins

Oct 25 (Reuters) – Energy transition and peak demand predictions have spooked investors in oil, putting the prospect of peak production sooner than anticipated accompanied by wild price spikes.

Key climate talks are set to begin at the end of this month in Glasgow, Scotland to tackle global warming under the 2015 Paris Agreement, with fossil fuel in policy-makers’ crosshairs.

But as it stands now, mobility curbs which hollowed out both spending on upstream oil projects and oil end use may already be set to permanently rein in the growth of both supply and demand.

“On current trends, global oil supply is likely to peak even earlier than demand,” the research department of bank Morgan Stanley said in a note this week.

“The planet puts boundaries on the amount of carbon that can safely be emitted. Therefore, oil consumption needs to peak. However, this is such a well-telegraphed prospect that it has solicited its own counter-response already: low investment.”

Oil demand and supply in 2030 and 2050
Oil demand and supply in 2030 and 2050
Global oil demand and declines in supply by scenario
Global oil demand and declines in supply by scenario

Still, with most oil producers and watchdogs putting the peak to the world’s thirst for oil at least several years away, demand is already veering back toward pre-pandemic levels. read more

The mismatch between demand for oil and other polluting fossil fuels roaring back to normal and output having lagged has helped contribute to an energy crunch in Europe and Asia, with crude prices soaring to multi-year highs.

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Oil Prices Will Remain High For Years To Come

Oil Prices Will Remain High For Years To Come

  • A growing number of major investment banks are turning bullish on oil in the medium to long term.
  • A lack of investment is leading to supply deficits as demand rebounds to pre-COVID levels.
  • Rebounding consumption and tight supply could push oil prices even higher.

Six years after former BP chief executive Bob Dudley said that “the industry needs to prepare for lower for longer,” a growing number of major investment banks now expect “higher for longer” oil prices.

Rebounding global oil consumption amid tight supply—contrary to some forecasts last year that indicate demand may have peaked or was close to its peak—as well as years of underinvestment in new supply following the 2015 crash, have prompted Wall Street banks to raise significantly their projections for oil prices in the short and medium term.

Oil prices have hit multi-year highs in recent days, with WTI Crude at its highest since 2014 and Brent Crude at the highest level since October 2018.

Even after the latest rally, prices still have headroom to rise further, many major investment banks believe.

Goldman Sachs, for example, sees Brent hitting $90 per barrel at the end of this year, up from $80 expected earlier. The key driver of Goldman’s higher forecast is global oil demand recovery amid still a weaker supply response from non-OPEC+ oil producers.

The investment bank also sees sustained higher oil prices in the coming years.

Fundamentals warrant higher oil prices, and the bank’s forecast for the next several years is $85 a barrel, Damien Courvalin, Head of Energy Research & Senior Commodity Strategist at Goldman Sachs, told CNBC earlier this month.

Oil demand will set record highs next year and the year after that, and we need to see a ramp-up in investment, he said.

“We’re facing potential multi-year deficits and the risk of significantly higher prices,” Courvalin told CNBC.

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Forget $100, Options Traders Now Betting On Oil Prices Hitting $200

Forget $100, Options Traders Now Betting On Oil Prices Hitting $200

  • $100 Oil is no longer an ‘outrageous’ bet in the call-options market
  • Some speculative traders are now betting on $200 oil in December 2022
  • For those betting on $100 oil, the leader of the OPEC+ alliance, Saudi Arabia, has a message: look beyond the end of this year; an oversupply is coming next year

As oil prices hit multi-year highs, some speculative traders are betting on the options market that oil could exceed $100 a barrel by the end of this year and even reach a record $200 per barrel by the end of 2022.

Call options give traders the right—but not the obligation—to buy assets at a certain price, the so-called strike price, by a certain date.

The amounts of call options at triple-digit strikes have soared in recent weeks, suggesting that more speculative traders are attracted by potential quick profits from options trades, which are relatively low-cost ways to speculate on the direction of an asset.

Some “wild” bets such as call options at a $100 per barrel WTI Crude strike by December 2021 or $200 per barrel Brent Crude by December 2022 have been placed in recent weeks, The Wall Street Journal reports, citing data from provider QuikStrike.

For example, at the end of September, call options at Brent at $200 a barrel for December 2022 traded 1,300 times in one day, amid a worsening energy crunch in Europe and Asia ahead of the winter heating season in the northern hemisphere.

In WTI, the number of outstanding call options with $100 per barrel strike price with different expiry dates has surged five times since early February 2021 to more than 141,000 contracts as of the middle of October, according to data from CME quoted by the Journal.

Other popular call options for WTI included strikes at $95 or $180, QuikStrike data reported by the Journal showed.

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