Storage is shown at the Marathon Petroleum Corp. refinery in Detroit, Tuesday, April 21, 2020. The world is awash in oil, there’s little demand for it and we’re running out of places to put it. That in a nutshell explains this week’s strange and unprecedented action in the market for crude oil futures contracts, where traders essentially offered to pay someone else to deal with the oil they were due to have delivered next month.(AP Photo/Paul Sancya)

And Then There Were Four Options Pursued, March 14

It is well understood that Canadian oil and gas producers will see record free cash flows in 2022. However to date, they have clearly stated that with their free cash flow they will largely focus on the following three options: pay down debt, introduce/increase dividends, and buy back their shares.

Now I expect that they will carry out a fourth option: increase capital spending soon after this spring breakup.

Conservatively assuming a WTI price of $85-$90, most oil (and some gas) producers are now likely revisiting their 2022 spending plans and many of them will decide to boost it by 10-20 per cent for the second half of this year. At these oil prices, oil producers do not lack quality exploration and development opportunities with production quickly coming on stream.

Such a move is relevant for investors for the following reasons:

  1. Production estimates for 2022 and 2023 will be increased along with cash flows and earnings. By Q4/22 and 2023, free cash flows and dividends would also rise while debt levels fall.
  2. Analysts will bump up their projections for the producers they cover for 2022 and 2023, including target prices.
  3. Although the industry mantra this year has been to pay down debt, increase dividends and buy back shares and not focus on increasing production, I believe a fourth mantra is about to be added: drill more oil wells with quick paybacks. Analysts and shareholders will see the value of this new strategy and give their seal of approval.
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U.S. Strategic Petroleum Reserve Bayou Choctaw. USSPR

Opening the US Strategic Petroleum Reserve didn’t help much April 7

After just three trading days since Biden announced his brilliant decision to open the US oil supply floodgates by releasing from storage 1 million bpd for 180 days, the price of oil has already recovered its fall, currently sitting at around $105.

However, significant damage has been done without any benefits in terms of lower oil and gasoline prices.

So the $64,000 question is what will Biden’s next step(s) be to attempt to reduce gasoline prices before the midterm elections this fall, because he definitely ain’t stopping now.

Here are a few possibilities. Firstly, he can bring in NEP2 and follow Trudeau senior’s multitude of great oil policies introduced in October 1980 (I remember it too well).

How about a ceiling price for current US production consumed domestically and keep the world price for new production- for some of you, remember Old Oil and New Oil?

Biden can also introduce a minimum profits tax of say 25 per cent-35 per cent applicable to all US oil companies for making obscene profits (after seven years of basically none).

This new tax could be coupled with a cap on US gasoline prices of say $3.50/gal.

These measures would offer great benefits to US voters by lowering fuel costs, possibly more tax revenues collected, and help reduce the rampant inflation problem.

And what would be the costs? US oil drilling would effectively halt, many of the oil investment dollars would move overseas with some trickling back to Canada, and the unemployment rate for oil workers in the field and offices would drop to at least 50 per cent.

I believe some of the measures I outlined above have at least a 50 per cent chance of happening, especially as Biden and his team become more desperate with oil price moving shortly back above $110 and gasoline prices reaching new highs. And this could be exacerbated by the US weather bureau’s call for an active hurricane season this summer.

Oh, and remember the 180 million barrels that will be removed from storage, it must technically be replaced eventually, likely at higher oil prices.

Poor Biden, if from the beginning of his term, he not canceled the Keystone XL pipeline and instead of seriously hampering it, encouraged oil and gas drilling in the US onshore and offshore. This would not have solved the oil price problem but it would have helped and importantly for him and his administration, they wouldn’t now be blamed for the high gasoline prices.

Last point: will Trudeau junior announce any measures in Thursday’s federal budget that includes an additional tax on Canada’s oil and gas industry; unlikely but this would make Trudeau senior very happy.

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Will Russian oil exports be sanctioned shortly? April 11

Watching cable news this morning discussing what is the most significant way to hurt Putin economically for his invasion of Ukraine, it was unanimous from the experts who commented that the only way is to curtail their oil exports to Europe.

Although the EU receives from Russia 25 per cent of their oil consumption and 40 per cent of their gas consumption, in 2021 Europe paid Russia $178 billion for oil and $61 billion for gas. Accordingly, cutting of as much oil imports as possible will clearly do much more financial damage to Russia.

The sentiment in Europe is growing that they must and will shortly take action to increasingly limit Russian oil imports by any measure, including even temporarily substituting it with coal. And the US is actively seeking for the EU alternative sources of oil, possibly even quickly making a nuclear deal with Iran to put more oil supply on the market, a deal in more normal times they would not make.

The point I am making here is that I am convinced we will shortly see the EU make a formal announcement that they will immediately phase out their Russian oil imports by a significant amount, possibly by 50 per cent or more. And even though some of this oil will find a new home in China and/or in India, this step will instantly have a large impact on oil prices. My guess is we would see a 15 per cent plus price bump which would continue to rise as world oil demand slowly and steadily increases.

Imagine what a positive impact a $115 WTI oil price just for the rest of this year would have on share prices of Canadian oil producers and those gas producers with a large weighting to liquids.

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More Strong Reasons For Higher Oil Prices April 13

Here are a few more reasons why oil prices will keep rising through this year:

  • The EU ministers are now meeting to consider how they can stop or at least significantly reduce importation of Russian oil and gas.
  • In a meeting yesterday between several EU members and OPEC members in Vienna, the OPEC group made it clear that they will not replace any reduced Russian oil exports, consequently oil markets will remain very tight.
  • The COVID-19 situation in China has started to show improvements thereby steadily restoring some lost demand.
  • World’s top oil merchant Vitrol will stop trading Russian-origin crude and oil products by this year end, starting this quarter.
  • There has been no negative impact on US gasoline demand in recent weeks despite the current very high gasoline prices. And it is important to note that we are only a month away from the start of the US peak driving season.
  • Sadly, Putin today made it very clear that their war against Ukraine is about to continue in an even more aggressive way as many suggest he must be done by May 7th, an important date, the date in 1945 when they defeated the Nazis.

All these factors, and there are many more I left out, to clearly indicate that oil prices now have only one way to go, higher, much higher. There is now better than a 50 per cent chance that WTI oil prices will surpass the $130 high of a few weeks ago before this summer.

Factor in the likelihood of $10 NYMEX gas this summer and you have the two key ingredients for another 30 per cent-50 per cent jump in quality Canadian oil and gas producers’ share prices by this year end.

 

Peter Linder currently works with business development and marketing relations with Matco Financial, a Calgary financial firm. He has over 40 years of experience in the oil and gas industry, and previously worked as an oil and gas analyst and fund manager. These opinions are his alone, and should not be construed as financial advice. You can follow him on LinkedIn here. He can be reached at ptlinder@yahoo.ca.

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