Naive. The Energy Report 03/13/2024

I guess if you believed some of the energy narratives over the last couple of years you must be naïve, I guess. Claire Coutinho, the UK’s Secretary of State for energy security and net zero, stated as much today when she said: “Anyone who tells you that we can just stop oil and gas is not just wrong but naive”. Well, that’s a little harsh. It is kind of like when the Biden administration tells you that gasoline prices are coming down, even though they are not, unless you adjust for inflation, that they tell you are going down, even though it isn’t.

Not only did we see the Consumer Price Index (CPI) come in higher than expected we also saw that the Energy Information Administration (EIA) sharply raised its gasoline price forecast on a day when the American Petroleum Institute reported a rather large 3.75 million barrel drop in weekly supply as refinery issues and better than expected demand significant are tightening supply. This is against a bullish backdrop of a bigger than expected 5.521 million barrels drop in crude oil supply a 1.162 million barrel drop in distillate and a 998.00 barrel drop in supply at the Cushing, Oklahoma delivery point. The CPI came up 0.4% for the month and 3.2% from a year ago. The core CPI rose 0.4% on the month and was up 3.8% on the year.

This came out before that EIA predicted that the U.S. average retail gasoline price will be about $3.50 per gallon this year, almost 20 cents/gal higher on an annual average basis in 2024.

It is also like telling the International Energy Agency that it was flat out ridiculous to tell the world to stop investing in fossil fuels immediately in a nod to the green energy lobby. A call that was widely panned as either extremely stupid or at the very best, naïve. Yet The IEA seemed to remember that their mission is energy security and not green energy lobbying.

It seems that the International Energy Agency (IEA) had a moment of clarity that OPEC was very keen to point out. In a report, OPEC put out a note called, “Oil Security: vital for All” OPEC called out the IEA by saying “We took note of the International Energy Agency (IEA) reaffirming the significance of oil security to energy transitions in its most recent commentary: “A strong focus on oil security will be critical throughout the clean energy transition”. In other words, OPEC was taking a victory lap because the International Energy Agency (IEA) had to backtrack from some of the ridiculous naive projections about supply and demand in the need for fossil fuels.

OPEC wrote, “At OPEC, we are encouraged by this message and the reference to the continuing importance of oil to the world. The IEA says in its commentary: “An enduring focus on oil security is a consequence of the continued need for oil to fuel cars, trucks, ships, and aircraft, as well as to produce the petrochemicals necessary to manufacture countless everyday items”. OPEC has strongly voiced these messages for many years, and we will continue to reiterate that energy security, energy affordability, and reducing emissions need to go hand-in-hand, as we look to an all-energies, all-technologies and all-peoples approach to energy transitions. OPEC also said that, “it is important to stress that the IEA’s talk of the need for no new oil and natural gas fields in its net zero pathway has contributed significantly to this uncertainty, which has the potential to lead to major energy chaos, not the desired energy security.”

Oil also found support because of more Ukrainian drone attacks on Russian oil facilities. Yesterday a report that a Russian refinery was on fire raised concerns about the ability of Russia to produce more oil. At the same time a report that Amos Hochstein of the Biden administration’s Special Presidential Coordinator for Global Infrastructure and Energy Security. He is working with India to allow them to buy more oil from Russia. So let me get this straight. We are trying to put sanctions on Russia but at the same time helping India buy more Russian oil. Mr. Hochstein said it isn’t about not allowing the oil to get out it’s only to make sure that India buys it at a low price. I wish that they would put in policies in the United States that would allow us to buy oil at a low price. Sort of like getting off the back of the US oil and gas industry. But maybe I am naïve.

This comes as the EIA had other bullish things to say about the state of the oil markets. The EIA raised its s 2024 WTI crude spot price to $82.15/bbl from $77.68/bbl. They also raised their forecast for 2024 World oil demand growth by 10,000 bpd, now seeing 1.43 mln bpd year-on-year increase. They also raised the forecast for 2025 world oil demand growth by 90,000 bpd, now seeing a 1.38 mln bpd year-on-year increase. They also raised its  US EIA lifted 2024 spot Brent oil forecast to $87/bbl from $82.42/bbl.

While the prospects for oil look great, the prospects for natural gas and US gas producers look bleak. The EIA reported that, “Natural gas prices are expected at the Henry Hub spot price to remain below $2.00 per million British thermal units (MMBtu) in 2Q24 as the winter heating season ends with natural gas inventories 37% above the five-year average. The Henry Hub spot price averaged $1.72/MMBtu in February (30% lower than in our February STEO), a record low adjusted for inflation. Low prices were partially driven by reduced natural gas consumption in the residential and commercial sectors this winter. Natural gas production they say remained unchanged in March from February at just under 104 billion cubic feet per day (Bcf/d).

We expect lower natural gas prices to cause slight declines in natural gas production for the remainder of the year, and we do not expect that natural gas production will return to its December 2023 record of 106 Bcf/d during the forecast period. Forecast U.S. dry natural gas production averages 103 Bcf/d in 2024, down slightly from 2023. Production increases to 104 Bcf/d in 2025, driven by expected growth in associated natural gas production in the Permian Basin and growth in LNG export demand.

Yet we expect there will be a drop in production bigger than the EIA believes. CNX, which is an Appalachian gas producer, is reducing its natural gas production in 2024 and announced delays for well completions on at least three sale pads. Other natural gas producers have to fight off the potential of bankruptcy as they are losing money. Not only do they have to pay the royalty rates and leases, they also have to pay for their drilling and their employees and their loans to the bank and they can’t do that when gas prices are almost negative.

HFIR says that, “While we believe that the bottom ($1.50/MMBtu) will hold, low gas prices are needed to tighten balances going forward. At ~102 Bcf/d, injection gas balances point to a deficit of 1.5 Bcf/d. This would push storage to ~4 Tcf by November.

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