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A Contrarian Investor’s access to OPEC’s Oil Spat

After seven consecutive weeks of gains, oil prices have once again gone into reverse, mainly thanks to a breakdown in OPEC + negotiations.

Oil prices have risen since OPEC + negotiations collapsed on Monday due to major disagreements between its members. Larger cracks appeared at the ministerial meeting with the United Arab Emirates continues to block an agreement because it wants to increase its oil production before demand falls per WSJ. The market fears that the UAE may “wants out of OPEC so it can pump 4M bbl / day and make hay while the sun is shining, ”Said Phil Flynn, market analyst at Price Futures Group MarketWatch.

The UAE̵

7;s objection blocked a proposal to ease existing production edges in a controlled manner and allow production to increase by 400K bbl / day each month until December, leading to an aborted OPEC + meeting without any new proposed date for the next collection. This actually leaves the organization’s current production limits in place. However, there is a growing sense that recent developments are not necessarily bullish for oil markets due to the risk that it may all fall apart and become free for all, meaning that much more oil is potentially being put on the market.

The markets look scary with oil futures charts in deep reversal; In fact, oil prices for U.S. crude oil for delivery in December 2021 are currently trading at a premium of $ 7 per barrel. mia. to oil for delivery in December 2022, the highest tense record.

Meanwhile, data from the US Commodity Futures Trading Commission shows that short positions among manufacturers rose to the highest since 2007 in mid-June, although they have fallen since then.

These are bearish signals suggesting that the market believes that current oil prices are not sustainable.

Nevertheless, the contrarian investor may ask to be different.

Here are 3 main reasons why it can now actually be a good opportunity to replenish oil and gas stocks:

# 1. Record revenue Rystad Energy says the US slate industry is on track to set a significant milestone in 2021: Record revenue before hedging.

According to the Norwegian energy-navel-gazer, US shale producers can expect a record-high hydrocarbon revenue of $ 195 billion before recognizing hedges in 2021 if WTI futures continue their strong run and average $ 60 per barrel this year and natural gas and NGL prices Remains stable. The previous record for revenue before hedging was $ 191 billion set in 2019.

The estimate includes sales of hydrocarbons from all horizontal oil wells in Perm, Bakken, Anadarko, Eagle Ford and Niobrara.

That said, Rystad says companies’ cash flows from operations may not reach a record before 2022 due to hedging losses of $ 10 billion in revenue this year.

Related: Qatar: Highest natural gas demand should occur around 2040

The good thing is that hedging losses may not be as high in the coming year because manufacturers are not so eager to use them.

Slate companies typically increase production and add to hedges when oil prices shine in an attempt to lock in profits. However, the crazy post-pandemic rally has caused many to wonder if this can really last, leading many companies to back up from coverage. In fact, 53 oil producers tracked by Wood Mackenzie have only hedged 32% of expected 2021 production volumes, significantly less than the same time a year ago.

And who is to say that oil prices cannot remain high.

Goldman certainly belongs to the bull camp and sees oil remain between $ 75-80 per barrel. Barrel over the next 18 months. This level should help companies drive down and improve their returns. Goldman has recommended Occidental (NYSE: OXY), ExxonMobil (NYSE: XOM), Devon (NYSE: DVN), Hess (NYSE: HES)and Schlumberger (NYSE: SLB), among other.

Goldman is not the only oil bull on Wall Street.

In early June, John Capital from Again Capital predicted it Brent would beat $ 80 per. Barrel in the summer and WTI to trade in the $ 75 to $ 80 range thanks to robust gasoline demand.

# 2 Mild Capex growth

Slate drills have a history of matching their capital expenditures to the strength of oil and gas prices, but not this time.

Rystad says that while sales of hydrocarbons, cash from operations and EBITDA for tight oil producers are likely to test new record highs if the WTI averages at least $ 60 per tonne. Barrel this year, investment will only see subdued growth as many manufacturers remain committed to maintaining operational discipline.

From the upstream cash flow perspective, we see that reinvestment rates fall to 57% in Perm and to 46% in other oil areas this year. Reinvestments in companies are generally expected to be in the range of 60-70% this year due to debt service and hedging losses, ”Artem Abramov, head of slate research at Rystad Energy, has said.

Rystad says company-to-company survey suggests a 50% average investment in the industry with WTI @ $ 65 WTI; 60% at $ 55 and 70% at $ 45 per. Barrel in 2021 to 2025.

In other words, oil and gas companies are likely to remain subdued even with higher oil prices, meaning that much of that money is likely to be returned to shareholders in the form of dividends and share buybacks.

# 3. Supply Crunch Although rarely discussed seriously compared to Peak Oil Demand, Peak Oil Supply is still a clear option over the next few years.

In the past, supply-side “top oil” theories mostly turned out to be wrong, mainly because their spokesmen inevitably underestimated the enormous amount of resources that had not yet been discovered. In recent years, the demand side of “peak oil” has always managed to overestimate the ability of renewable energy sources and electric vehicles to displace fossil fuels.

Then, of course, few could have predicted the explosive growth of American shale, which added 13 million barrels a day to the global supply from just 1-2 million b / di in just a decade.

It is ironic that the shale crisis is likely to be responsible for triggering the Peak Oil Supply.

In a excellent op / ed, Vice President of IHS Markit Dan Yergin notes that it is almost inevitable that shale production will go backwards and fall thanks to drastic cuts in investment and only later recover at a slow pace. Shale oil wells fall with an unusually fast cut and therefore require constant drilling to rebuild lost supply.

In fact, Norway-based energy consulting firm Rystad Energy recently warned that Big Oil could see its proven reserves run out in less than 15 years thanks to quantities produced that were not fully replaced by new discoveries.

According to Rystad, documented oil and gas reserves are from the so-called Big Oil companies, namely ExxonMobil (NYSE: XOM), BP Plc. (NYSE: BP), Shall (NYSE: RDS.A), Chevron (NYSE: CVX), Total (NYSE: TOT), and eni (NYSE: E) all fall as quantities produced are not fully replaced by new discoveries.


Source: Oil and Gas Journal

Just last year, massive write-downs saw Big Oil’s documented reserves fall by 13 billion boe, which was good for ~ 15% of its stock level in the ground last year. Rystad now says the remaining reserves are expected to run out in less than 15 years, unless Big Oil quickly makes more commercial discoveries.

Related: Will $ 70 Oil Tempt US Manufacturers to Open Faucets?

The biggest culprit: Rapidly shrinking investigative investment.

Global oil and gas companies cut their capex by a staggering 34% by 2020in response to declining demand and investors getting tired of persistently poor returns in the sector.

The trend shows no signs of moderation: the discoveries in the first quarter amounted to DKK 1.2 billion. Boe, the lowest in seven years with successful wildcats that gave only modest finds according to Rystad.

ExxonMobil, whose proven reserves fell by 7 billion boe in 2020 or 30% from the level in 2019, was the worst hit after major reductions in Canadian oil sands and U.S. shale gas properties.

Meanwhile, Shell saw its proven reserves fall by 20% to 9 billion boe last year; Chevron lost 2 billion boe of documented reserves due to write-downs, while BP lost 1 boe. Only Total and Eni have avoided reductions in documented reserves over the past decade.

Still, political changes from the City’s administration as well as fever-climate activism are likely to make it really difficult for Big Oil to return to its trigger-happy drilling days, meaning American slate can really struggle to return to its halcyon days.

By Alex Kimani for Oilprice.com

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