08 Sep What’s in Store for Q4?
Whoa!
Anyone been paying attention to the news? There’s a lot of conflicting voices on where the economy is going and how best to “hunker down” (if at all) both worldwide and domestically.
Honestly, as intuitive as the past has been for me in predicting short-term pricing and opportunity, there are so many factors in play that are so intermingled that my brain feels like a pretzel.
I’m going to do my best to boil down what’s happening today (and throw away by Doctorate’s paper on this) on how it should affect O&G pricing and opportunity for Q4 domestically.
Oil: Driving factors? Supply, Demand, Trading, and production discipline.
OPEC+ is not creating any excess capacity of oil. If you recall, Macrom (France) said so point blank to Biden (US) at the G7 Summit late June. As you can see from the chart below, not much has changed.
US currently not creating excess crude either. 60 days of supply for crude in US is 60 has been typical for the past few years. Refined fuels/oils and gas prices will be higher than last year as has been the trend due to demand and shorter refinery supplies.
Russia has been using in-betweens (old Soviet bloc countries) and have bolstered alliances with China and India to take production at discounted rates. China will need to talks with Russia to go well they can exchange oil with Yuan to survive in 2023. Their debt to GDP ratio is dangerous and will spell deep recession and direct takeover of Taiwan as their currency is not tied to petroleum (like ours).
Natural Gas: Driving factors? Geopolitics and domestic steady demand over supply
Russia cutting off Nordstream1 for “maintenance”, the second most ridiculous reason they could have used! Most ridiculous would be for “environmental concerns”! This is direct retaliation for Russian oil price cap being considered by the G-7. EU is already feeling the pain in both its citizenry and manufacturing from lack of Russian supply. Recession has already begun there…
LNG transport to Europe underdeveloped, especially over the Atlantic. Nordic countries simply cannot supply enough to keep up.
Locally: Suburban sprawl, lack of pipeline permitting, and the memory of winter shutdowns 2 winters ago.
Conclusions on pricing?
The key to steady domestic and worldwide pricing is mainly production discipline. No one country (not even Russia) will, or really, can over-produce. The semi-embargo of Russia’s production appears not to affect crude worldwide pricing as much as refined product. Shutting down of the natural gas in EU, however, does and will keep prices unnaturally high even domestically (although we’re relatively balanced). Additional stop-gaps from massive price hits domestically are lack of government permitting (leases and pipelines), high transportation, consumables, & equipment costs, and shortage in labor.
So, What Does This Mean for You?
You can expect pricing on natural gas to stay high in Q4 between $7-$10 per MCF and oil to stay between $75-$90. Although the rest of the world will be in turmoil on end-user pricing, the US will not. Most development programs are already in planning or field and development expenditures have been sourced. AFEs are still reasonably disciplined, and the participant can expect good payout and ROIs even if Q1 2023 market prices decrease 20-30%.
Renewables and nuclear cannot substitute for fossil fuels today. No such thing as cheap fuel, and in some cases, any fuel! Fossil fuel investments have been a backstock for many decades to the public markets.
Time to engage, buckle in, and enjoy conservative returns. North America can breathe pretty easy…