The market is wrong about oil. As I write, the price of a barrel of West Texas Intermediate crude fell to $77, down from $120 in June. Brent crude sells for $84 a barrel, down from $127 in March. And natural gas in Louisiana trades for $6.75 per MMBtu, down from $9.68 per MMBtu in August.
These prices are all down due to global fears of demand destruction coupled with the draining of the Strategic Petroleum Reserve in the United States. Hydrocarbon prices will not only return to those highs over the next five months but will set records as well.
Book It, Done
For almost 20 years, the most reliable trade you could make was to go long natural gas in August and sell in February. Then fracking came along and produced a surplus of natural gas, which destroyed pricing all year long. Natural gas fell from $13 per MMBtu in 2006 to $2 per MMBtu in 2012. Thus was the power of fracking.
The pendulum has swung back in the other direction and now natural gas in all its forms is set to increase in price as the flow from Russia to Europe is cut off.
The real Russian embargo starts in December when some 2.4 million bpd are stopped at the border.
The EU is facing a cold winter that will kill people who can’t afford to keep the heat on. Factories are closing. Small shops and pubs are locking their doors. Firewood has doubled in price.
With this emergency on their doorstep, you would expect that leaders would encourage energy companies to produce more or perhaps praise those who endure the frosty cold of the North Sea to keep the heat on at home…
Hahaha, no.
The worst leadership since the 1930s blames the very people who might be able to make up the difference in energy flows. They enact windfall taxes and blame the hydrocarbon companies for profiteering. The secretary-general of the U.N. recently lambasted the oil industry for “feasting” on record-high profits and urged governments to make them pay for this.
If they keep it up, they will not only have high energy prices but shortages as well.
Of course, these are the same leaders who shut down nuclear, coal, and gas and switched to solar in sunny Northern Europe. They had no backup plan, and today they are scrambling. The global elites are more than willing to sacrifice the old and the poor on the green altar of Pangea.
Back in the USA
The wise and just government of Biden has been pumping oil from the SPR for about six months. It is now at the lowest levels since Madonna had her first hit on MTV.
The inventory level at the SPR had declined by another 7 million barrels a week and a half ago, meaning the total was 427 million barrels. There is now less oil in the SPR than in commercial storage.
SPR oil selling is set to end in November just after the midterm elections.
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OPEC Shortfall
The Saudis, who are very savvy concerning the global oil game, have recently told the world that OPEC’s production was short last month by 3.58 million bpd, or 3.5% of global demand.
There is no telling if OPEC really can’t produce more or is inclined to let the U.S. sell its oil for cheap and wait for better pricing. You can only empty the SPR once before refilling it.
China Opens
The big news today out of China is that it's allowing people to go back to the gambling playground of Macau. According to Barrons, “Macau officials said Chinese tour groups will be allowed to return to the gambling center as soon as November.”
Companies like Melco Resorts & Entertainment (NASDAQ: MLCO), Wynn Macau (OTC: WYNMY), and Las Vegas Sands (NYSE: LVS) top the leaderboards with stock gains ranging from 14%–27%.
Reuters is reporting that Chinese refiners are eyeing increasing demand and ramping up production.
If the oil shock plays out as expected, marginal producers in emerging markets will benefit as Europe continues to seek replacement energy.
I’m doing my due diligence and will have some fresh reports out in the next few weeks.
All the best,
Christian DeHaemer Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
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