There are umpteen reasons for oil prices to stay high. I may miss listing them all but I will list all that I can think of and all that I have understood. Meanwhile, in yesterday’s report, the link that was provided included a lot more reports by other contributing authors of Breezy Briefings. In this report, all my past important oil reports are at the end of the article.
The biggest problem that is with the markets now is that there is a serious disconnect between perception and reality. The narrative that is being communicated by various media outlets, channels, publications, and research analysts is that the switch to alternative energy will take place fairly quickly. That is really not going to happen. It may take a decade or even two. It is difficult to tell now. Meanwhile, our dependency on fossil fuels will continue.
The common perception is that the biggest gains in the energy sector have already happened and it is behind us. No doubt they have soared from their pandemic bottom and they continued rising this year too when everything else in the world was crashing. Think there is a consensus view that the current boom can’t last that long based on past historical evidence. Think that may be wrong this time around.
More than 95% of vehicles still sold now run on gasoline. And given that the average life of a vehicle on the road is about 15 years, it will be a decade or two before we see a full transition to EVs. The truth is the transition will take much longer than what is being communicated.
Biden has been begging Saudi Arabia and Venezuela to produce more when the US has excess production capacity with vertical and offshore drilling. There is hardly any new drilling taking place due to Biden’s ESG objectives and the number of new leases issued currently is at an all-time low. Most major oil companies are returning cash to shareholders, either through increased dividends or share buybacks. If the so-called climate issue is global and global leaders are aiming to heal planet earth, in what way does it help Saudi and Venezuela to produce more and US to cut down on their production?
All these talks about bringing Iranian oil to the markets also don’t make sense. Their technology is ancient and it is not going to move the needle. With the country run by radical leadership, there is no good business that you can do with bad people.
Germany made the biggest mistake of shutting all of the nuclear energy plants and partnering with a despot like Putin. The Nord Stream 2 is Putin’s economic weapon on Europe, especially Germany. Now he is using it effectively to bring the Europeans back to the table for discussions.
Actually, it is not that Russia has much excess capacity and their technology is much inferior to what the Saudis, Canadians, Mexico, and UAE have. With service companies like Halliburton, Schlumberger, and Baker Hughes out of Russia, they really don’t have much talent to depend on to. On top of that, they are supplying oil to India and China at a significant discount. This cannot continue for long.
The shale oil break-even price is around $60 in the US and current oil prices are good for them to be in business but don’t think Wall Street investors are very excited about backing that business. Having said that some Shale producers are coming online but surely that is not the future.
The current weakness in oil is largely due to a major correction from the overbought situation. The supply from the strategic petroleum reserves by the government has also contributed to the present weakness in oil. Very soon the current low levels have to be replenished by the strategic reserves.
Going forward think OPEC led by the Saudis will have a bigger say in the price of oil. I think current prices of $75 levels are good levels to buy into oil ETFs and solid oil companies. Whichever way I see it higher prices are here to stay.
Breezy Briefings Note: Abraham George’s older posts on oil are given below. Yesterday’s error is sincerely regretted:
Oil presents better buying opportunities again
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.