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Our Oil Predicament Explained: Heavy Oil and the Diesel Fuel it Provides Are Key

Our Oil Predicament Explained: Heavy Oil and the Diesel Fuel it Provides Are Key

It has recently become clear to me that heavy oil, which is needed to produce diesel and jet fuel, plays a far more significant role in the world economy than most people understand. We need heavy oil that can be extracted, processed, and transported inexpensively to be able to provide the category of fuels sometimes referred to as Middle Distillates if our modern economy is to continue. A transition to electricity doesn’t work for most heavy equipment that is powered by diesel or jet fuel.

A major concern is that the physics of our self-organizing economy plays an important role in determining what actually happens. Leaders may think that they are in charge, but their power to change the way the overall system works, in the chosen direction, is quite limited. The physics of the system tends to keep oil prices lower than heavy oil producers would prefer. It tends to cause debt bubbles to collapse. It tends to squeeze out “inefficient” uses of oil from the system in ways we wouldn’t expect. In the future, the physics of the system may keep parts of the world economy operating while other inefficient pieces get squeezed out.

In this post, I will try to explain some of the issues with oil limits as they seem to be playing out, particularly as they apply to diesel and jet fuel, the major components of Middle Distillates.

[1] The most serious issue with oil supply is that there seems to be plenty of oil in the ground, but the world economy cannot hold prices up sufficiently high, for long enough, to get this oil out.

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Oil To Face “Serious” Supply Problem In 2024 As Production Capacity Runs Out, Goldman Warns

Oil To Face “Serious” Supply Problem In 2024 As Production Capacity Runs Out, Goldman Warns

Heading into 2023, Goldman was bearish on most asset classes, except commodities where the bank forecast a 43% gain as “supply shortages bite.” Since then the commodity picture has ebbed and flowed, and after commodities experienced a modest bounce following China’s unexpected reopening, they have resumed sinking with oil trading just above the Biden admin’s (supposed) SPR refill floor of $72, despite a near consensus that Chinese oil demand will hit record highs in 2023.

So has the recent setback dented Goldman’s optimism? Not at all: in fact, according to Goldman chief commodity strategist, not only will oil rise back above $100 a barrel this year, it will rise much more in 2024 when it will face a serious supply problem as spare production capacity runs out.

Speaking on the sidelines of a conference in Riyadh, Saudi Arabia, on Sunday, Goldman chief commodity strategist Jeff Currie said that with sanctions likely to cause Russian oil exports to drop and Chinese demand expected to recover as the country ends its Covid Zero policy, prices will rise above $100 from their current level of around $80. Meanwhile, doubling down on his key long-term thesis, Currie said that a lack of spending in the industry on production needed to meet demand will also be a driver of higher prices, and this lack of capacity may become a big issue by 2024.

“The commodity super cycle is a sequence of price spikes with each high higher and each low higher,” said Currie, who predicted that by May, oil markets should flip to a deficit of supply compared to demand. That could use up much of the unused capacity global producers have, which will send prices higher.

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Food shortages as the energy crisis grows and supply chains break?

Food shortages as the energy crisis grows and supply chains break?

Preface. This is a long preface followed by two articles about how supply chains and complex tractors may be affected by energy shortages and consequent supply chain failures in the future.Which we’re already seeing as massive numbers of ships sit offshore waiting to be unloaded, and a shortage of truckers to deliver goods when they do arrive.

Supply chain failures will only get worse, affecting food supply and making the prediction of 3 billion more people by 2050 unlikely.  We are running out of time to replace fossil fuels with something else that is unknown and definitely not commercial for transportation, manufacturing and other essential services and products. Even the electric grid needs natural gas to stay up, no matter how many wind turbines or solar panels are built (Friedemann 2016).

The reason time is running out is that global conventional oil, where 90% of our petroleum comes from, peaked in 2008 (EIA 2018 page 45), and world oil production of both conventional and unconventional oil in 2018 (EIA 2020).

In the unlikely event you don’t know why this is scary, consider that we are alive today thanks to heavy-duty transportation, which runs almost exclusively on diesel, four billion of us are alive due to finite natural gas derived fertilizer, 500,000 products are made out of fossil fuels, and much of our essential manufacturing (cement, steel, metals, ceramics, glass, microchips) depend on the high heat of fossil fuels. There is not much time to come up with processes to electrify or use hydrogen to replace fossil fuels, which don’t exist yet, let alone rebuild trillions of dollars of infrastructure and a new unknown energy distribution system, triple the electric grid transmission system, and replace hundreds of millions of vehicles and equipment to run on “something else” (Friedemann 2021).

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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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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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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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Why U.S. Shale Won’t Go To War With OPEC+

Why U.S. Shale Won’t Go To War With OPEC+

  • OPEC+ will be very happy with where oil prices currently are and is unlikely to change its course anytime soon
  • The U.S. does have the ability to increase production, but U.S. shale does not have support from either the government or shareholders to boost production significantly
  • The two bearish variables that could drag prices down in the near term are a strong dollar and the continuation of inventory builds

For years, the Kingdom of Saudi Arabia’s economy has suffered from low oil prices. Since 2014 when it increased supplies to try and break American shale producers, Saudi Arabia has had to struggle with a flooded market. Its cash reserves have been drawn down by hundreds of billions and it had to sell a small percentage of its prize asset, Saudi Aramco. At the same time, Saudi Arabia’s Vision 2030 plan fell behind in its lofty goals of diversifying its economy. I discussed this at some length in a prior Oilprice article. Now with the price of Brent – the benchmark against which Saudi Arabia prices its production – finally back above the $80 mark, the Kingdom is beginning to refill its coffers. So it was no great surprise when the Saudis and the Russians, the two principal members of the OPEC+ cartel, roundly rejected a demand from President Biden to increase production to ease the world’s energy crisis.

Up to this point, there had been some lingering concern on the part of OPEC+ that too high a price would reinvigorate the shale industry that had finally come to heel in early 2020. Restraint on the part of shale drillers since then has encouraged them that a new “war” for market share won’t be the result…

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Saudis Respond To Biden: Your Energy Crisis Isn’t Our Problem

Saudis Respond To Biden: Your Energy Crisis Isn’t Our Problem

US gas prices at the pump (national average) are at $3.421, having soared since President Biden was elected – much like they did when President Obama was elected – to some of the highest prices in history…

President Biden refuses to take any blame for this. Instead of realizing the climate-crisis-focused policies are impacting the fossil fuel supply chain before the replacements are ready to fill the void, he has blamed COVID and OPEC+ – driving America to be more dependent on foreign oil rather than increase production domestically.

“Oil is not the problem… The problem is the energy complex is going through havoc and hell.”

Of course, always wanting to signal their virtue and follow the narrative – and amid the farce that is COP26 – Democrats have decided that this is the right time to offer a bill that stops banks from financing fossil fuel plans.

Senators Edward Markey and Jeff Merkley introduced the bill which would would require the Federal Reserve to mandate that major banks stop the financing of projects that emit greenhouse gas emissions.

The legislation would prohibit financing of new or expanded fossil fuel projects by 2022 and prohibit the financing of all fossil fuel projects by 2030. It would also prohibit thermal coal financing by 2025.

Which, of course, will lead to less development, lower supply, and higher and higher prices…

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World Should Brace for Global Oil Shortage and Skyrocketing Price Due to Worsening Crisis

World Should Brace for Global Oil Shortage and Skyrocketing Price Due to Worsening Crisis

According to economists, chronic underinvestment in new oil supply since the 2015 crisis, as well as pressure on oil and gas corporations to reduce emissions and even “keep it in the ground,” would likely lead to global oil output peaking sooner than initially projected.

This would be a positive outcome for green energy proponents, net-zero agendas, and the environment if it weren’t for one simple fact: oil demand is recovering from the pandemic-induced dip and is on track to reach a new annual average record as early as next year.

Nearing Peak Oil Consumption?

Analysts have predicted that peak oil consumption will arrive sooner than envisaged just a few years ago, thanks to the energy transition and numerous government initiatives for net-zero emissions.

However, based on current oil and gas investment trends, global oil production may peak before global oil demand, creating a supply imbalance resulting in increased market volatility, price spikes, and perhaps fundamentally higher oil prices by the middle of this decade.

In a report published by Reuters this week, Morgan Stanley’s research department noted, “On present trends, global oil production is projected to peak much earlier than demand.”

“The planet establishes limits on how much carbon may be safely released. As a result, oil consumption must peak, according to Morgan Stanley analysts.

The problem with the globe is that oil consumption is not peaking, despite wishful thinking, investment pressure, and other factors. According to most forecasts, it will not peak until the end of this decade at the earliest.

OPEC Report

According to OPEC’s latest annual estimate, global oil consumption will continue to climb through the mid-2030s, reaching 108 million barrels per day (BPD), then plateauing until 2045.

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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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White House Putting Pressure on OPEC to Increase Oil Production Amid ‘Supply Issues,’ Rising Energy Prices

White House Putting Pressure on OPEC to Increase Oil Production Amid ‘Supply Issues,’ Rising Energy Prices

The White House on Tuesday promised to put pressure on members of the Organization of the Petroleum Exporting Countries (OPEC) to increase production amid declining supplies and rising energy prices.

Press secretary Jen Psaki told reports at a press briefing that the president is “mindful” of the increased prices consumers are facing when it comes to their energy bills and that he “reserves a range of options,” to combat the situation.

Psaki said the administration is focusing on raising its concern with “supply issues as it relates to oil” on the international stage.

“There’s a power of the president of the United States engaging on that front,” she said. “That issue has been raised at [national security adviser Jake Sullivan’s] level, at a range of levels throughout government, but certainly the supply … and putting additional pressure on OPEC is something that certainly our national security team will continue to do.”

The administration is “concerned” over the high gas prices and has asked the Federal Trade Commission (FTC) to investigate the matter, Psaki said.

“I will also note that as it relates to gas prices, we remain concerned about trends we have seen where even as supply has increased at times over the last several months, we’ve still seen heightened prices,” she said. “We’ve asked the FTC to look into that.”

Jerry Simmons, president of the Domestic Energy Producer Alliance (DEPA), has blamed Biden administration policies for hindering U.S. oil and gas companies from producing energy commodities, and securing American energy independence and lower prices for American families.

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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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Olduvai IV: Courage
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Olduvai II: Exodus
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