The timeframe of November through the first part of December saw levels of volatility in oil prices unseen for years. This article details some of the numbers supporting the shapeshifting market. But, in time, the fundamental drivers of supply, demand and geopolitics will clear up the tattered picture, as it always does. The OPEC decision to leave quotas intact created a tsunami effect for industry players. However, a slight bit of clarity is emerging as one large oilfield services firm notes some initial observations in production and investment activity around the world.
World-wide, the state of greenhouse gas emissions is abysmal. The two following graphics sum up the state of greenhouse gas emissions (GHG): how much we are emitting and the sources of origin. GHG emissions increased from 27 to 49 gigatons of CO2 equivalent per year between 1970 and 2010; the last decade was the highest in human history, which is not surprising. A gigaton is equal to one billion tons.
The Intergovernmental Panel on Climate Change says:
Globally, economic and population growth continue to be the most important drivers of increases in CO2 emissions from fossil fuel combustion. The contribution of population growth between 2000 and 2010 remained roughly identical to the previous three decades, while the contribution of economic growth has risen sharply.
In Asia, GHG emissions rose by 330% over the last four decades, reaching 19 GtCO2eq/year in 2010. The Middle East and Africa's GHG emissions grew 70%, Latin America by 57%, and advanced economies by 22%. In absolute terms, international transportation contributes a relatively smaller amount of GHG emissions, but they are growing rapidly. The increased use of coal since 2000 has reversed the slight decarbonization trends, they note.
(AFOLU is agriculture, deforestation, and other land use changes, a second largest contributor to GHG emissions.)
From an investment point of view, considerable reversals of investment in the non-OECD world would be needed to bring emissions into a range of stabilization in the "extraction of fossil fuels" category. Between the period 2010-2029, an average of approximately $300 billion per year, up to $600 billion, would need to be spent by both advanced and non-advanced economies in energy efficiency across sectors to stabilize emissions. Global total annual investment in the energy system is about $1.2 trillion. Annual incremental energy efficiency investments in transport, buildings, and industry is projected to increase by $336 billion, largely from modernizing equipment. (The charts are sourced from the IPCC's Fifth Assessment report, mainly from the Workgroup III section.)
Flowserve Corp., a leading manufacturer and service provider of flow control systems, is poised to capture the resource-focused trends spanning the globe. As a global firm with a $9 billion capitalization, Flowserve is both geographically-diversified and diversified within energy infrastructure, water infrastructure and industrial sectors. The firm is poised to negotiate the dual-track energy developments in conventional and unconventional hydrocarbon trends as well as clean energy. Given population growth, resource-constraints, and climate change scenarios[i], their portfolio touches most of the underlying industrial processes that modern and modernizing societies require. (The rest of the article can be viewed on Seeking Alpha for 30 days, when it will subsequently appear behind their paywall.)
As of October 23rd, a floor may have firmed up beneath oil prices in the low $80 range for WTI. Major oil field services firm Halliburton does not see signs of its customers altering production plans at present. Large independent producer Occidental Petroleum notes in its earnings call for the third quarter that they are not making any deviations from earlier plans in the Permian Basin. (See a more in-depth article about oil market fundamentals and market players, "Global Oil Markets: There and Back Again.") From last week, when the bottom was nowhere in sight, the oil market appears to be finding its equilibrium, rising up from the lower $80s for both WTI and Brent crude prices. This series of articles provides numerous charts of fundamentals, including what margins a few key Permian Basin players rely on to produce profitably:
- "Global Oil Markets Finding a New Groove?" Oct. 16th here.
- "Fundamentals of Pioneer, the Permian Basin, and Oil Prices," Oct.15th here.
- "Oil Market Karma Reversed?" Oct. 9th here. And an update to that article: "The OPEC Oil Market Gambit," Oct 14th here.
Today, the Seeking Alpha article, "Oil Market Karma Reversed?" offers a look at the fundamentals driving, or that should be driving, the oil market. Of course, volatility is an aspect of the oil market across decades. The reversal part of the title relates to an earlier article from December, 2013 that relayed the effects being noticed from U.S. shale oil production, namely that U.S. production was moderating some of the price volatility given global supply outages that would normally have driven prices up. An October 2013 article discusses fundamentals and the Permian Basin, and chronicles how shale basins were producing. Given the fundamentals, markets have been potentially over-reacting in their heavy blows to oil and gas producers and midstream firms.
Given the breakneck-pace of shale oil production in the Bakken, Eagle Ford and Permian Basin, many stocks of the larger exploration and production firms drilling in these basins have been hammered as West Texas Intermediate (WTI) has tumbled.
Pioneer Natural Resources, a leader and top producer in the Permian and Eagle Ford, has seen its stock rise to $234.00 and fall back to $184.00, from virtually the same position as last year. $13.3 billion market cap Concho Resources (NYSE:CXO) followed the same trend as Pioneer. The smaller, newer additions such as RSP Permian (RSPP) recognized smaller price losses but it began from a lower price realization as a new IPO in January of 2014. When interviewing the CEO of RSP Permian in July, the sentiment about the Permian Basin's sustainability was positive.
According to Gray, he expects the Permian to continue producing when other basins slow down. Given its 'massive reserves, right geology, and history of oil and gas infrastructure,' these attributes combine for ease of operations and competitive advantages. The midstream segment of the oil and gas industry, charged with transporting, processing and storing resources, has been tracking the developments in production with some time lags. A recently published interview with CEO Kelcy Warren of Energy Transfer, a publicly-traded family of MLPs, or master limited partnerships, reveals one firm's continued growth and transformation as the industry continues to increase production. The midstream sector has made considerable investments in infrastructure to move the U.S. supplies around the country, and for export. (My report details some of the growth areas emerging from the midstream sector.)
Concerns about the oil supply growth with the potential for glut have been on the radar of numerous analysts for over one year. The prices of Brent crude and West Texas Intermediate (WTI) have fallen in tandem in the last few months. "WTI fell below $90 a barrel today for the first time in 17 months, extending this year’s decline to 9.9 percent," notes Bloomberg, and "Brent crude, fell 20 percent from its June peak to trade at $92.24 a barrel today on London’s ICE Futures Europe exchange." Weaker global demand and ample supply is a main culprit of the Brent crude decline; conversely the WTI declines are partially based on supply factors resulting from U.S. oil supply growth, along with the influences of Brent factors.
With geopolitical tensions strife across the globe, news of Rosneft's Kara Sea well result makes for an interesting diversion. The firm announced the "northernmost well" in history. The area in question is said to contain more oil and gas than the Gulf of Mexico. Apparently, more drilling results will be needed over time to confirm or adjust the resource projections. See a Seeking Alpha article of mine for more detail and indications of Russia's Arctic passageway infrastructure build out. The Moscow Times says:
"The first oil was extracted. It is an astonishing sample of light oil, which based on the results of the analysis performed, is comparable to Siberian Light oil," [CEO] Sechin said in a statement on Rosneft's website. He said Rosneft would like to call the discovered field "Pobeda," Russian for victory...But it was not yet clear whether commercially viable quantities of oil could be recovered from the well. Rosneft said data from the well will be analyzed and only then could a conclusion be reached on the reserves there.
As previously mentioned, the report titled, "U.S. Oil and Gas Going Places: Parsing a Midstream Perspective," is available. After detailing shale oil developments, trends and players in production for over a year, this inaugural report kicks off hopefully a first of many. Many of the articles that chronicle these developments are housed on Seeking Alpha. However, over the last five months, I have spent time delving into how the trends in shale oil and gas production are trickling down to the midstream area. In June, I was very fortunate to interview Energy Transfer CEO Kelcy Warren. The interview from D CEO's October special oil and gas issue inspired the report; the report is the backstory to some of the interesting investment choices and directions of Energy Transfer but also indications and analysis of the larger trends occurring in the industry. Link to the report page.
This site will be a clearinghouse for a combination of blog posts of commentary and research and analysis reports and briefs. Most importantly, I will write about and analyze those aspects of energy and resources that attract my attention, perhaps require further explanation, or need another perspective.
The first "report" in the planning stage is background analysis and research and the insights gleaned from an upcoming article about Energy Transfer. It will be the work I did behind the scenes to understand the shifts occurring in the oil and gas industry, and what it may mean in the future. I will direct readers to the article once it is 'live.' My intended roll out of the analysis brief, for lack of a better term, is about three weeks from now.
Please bear with me as I expand the site. I hope the experience of the site and the help I offer in providing context for trends, decisions and changes in the global resource narrative proves useful and informative.