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Oil & Gas June 2022

Facts

- Hurricane season forecasted to be higher than normal[1]. 47% of US petroleum refinery capacity exist in probable hurricane impact zones.

- Refineries are essentially at maximum utilization. Latest date of March 2022 shows refineries at 91.3% capacity[2]. The remaining 9% are likely down for maintenance or seasonal blend transition.

- US remains a net importer[3]

- OPEC+ agrees to boost output by 648k barrels per day. Only for July and August.[4] Additionally, some of this oil is supposedly coming from Russia. What of the Russian oil sanctions recently emplaced by the EU?

- US has already released SPR. Price per barrel has adjusted for this event.

- Europe requires additional support from US oil products.[5]


Charts

Figure 1 All US Oil Refineries by Volume


Figure 2 U.S. Percent Utilization of Refinery Operable Capacity

Figure 3 Net Imports of Crude Oil



Figure 4 Crude Oil Spot Prices


Narrative


A reluctance to accumulate traditional fuels for ESG reasons, combined with a shortfall of "renewable" energy output, has created a global energy deficit. Demand for energy in forms of heating, cooling, transportation, manufacturing, and the like has not decreased. However, the supply has. Legislators are hampered by a myriad of political concocted factors and are unable to act in an effective manner to address the core issues. Remedies rest within private industry, which are throttled by investors and legislators. If private energy industry were given free reign, consumers would not see price decreases for months, or years in some regions.


Not at the Peak


The cost of a barrel of WTI in November 2000 was $33. Using the BLS official CPI calculator and adjusting for inflation that would be $55. Which we have surpassed. However, in June 2008 WTI peaked at $139, which would be $185 in today's dollars. As of this writing, the cost of WTI is ~$118. By some inflationary mathematical sense, WTI has room to go beyond $185.


Around the globe major industrialized nations are either halted or reduced in their consumption and production. Or they have been shunned from the global market. This means they are not purchasing oil and other petroleum products from the global market. If these nations were to come back online, it would increase the demand and oil prices would spike higher.

There are plans to issue subsidies to ease the burden at the gas pump. However, this will prolong the time it takes to bring prices back down. High prices will destroy demand. Artificial strength of the demand will only maintain or increase prices.


These factors could contribute to oil and gas prices rising higher.


What Happens After the Peak?

Recent peaks in gasoline and oil prices have been followed by a recession[6] (see figure 5). Gas and oil (energy) are major input costs for producers and firms. As those prices rise, the cost of goods sold (COGS) rises and the end consumer pays more. As consumers pay more for all goods, they make fewer purchases (slowing velocity of money). Causing a loss of revenue and closure of discretionary or non-essential producers.


Figure 5 Oil and Gas Prices


Allowing oil and energy prices in general to rise is needed at this moment to help quell inflation. There is a surplus of money in the economy causing inflation, some of this money needs to be destroyed. This destruction will reset balances and depress the rate of inflation. As more money is spent on energy, firms will tighten budgets and many, not all, will pay down debt before taking on new debt. Paying down debts will reduce the supply of money.


However, there does need to be a rotation back to producing more discretionary goods along with the destruction of excess money in the system, to truly normalize prices.

Should the unfavorable conditions of gas and oil persist, you may find it prudent to mentally prepare for what’s to come through study of the 1970’s gas shortages.

[1] https://www.noaa.gov/news-release/noaa-predicts-above-normal-2022-atlantic-hurricane-season [2] https://www.eia.gov/dnav/pet/pet_pnp_unc_dcu_nus_m.htm [3]https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php [4] https://www.cnbc.com/2022/06/02/oil-prices-eu-sanctions-russia-saudi-arabia-output-opec.html [5] https://www.bloomberg.com/news/articles/2022-05-03/u-s-sent-largest-amount-of-oil-to-europe-last-month-since-2016 [6] https://fred.stlouisfed.org/series/DCOILWTICO#

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