The energy crisis is a tragedy for the consumers as many are facing paying 50% more for heating their homes this winter. This morning on Bloomberg Francisco Blanch, BOFA Global Research, commented that Europe, and to some extent the world, are victims of their own failed energy policies. Rushing to renewable energy without the technology or plan to support the migration actually is going to harm the environment more than a properly planned energy migration to renewables.
Some of the key points brought up in this interview are also the timelines for implementation of the new technology required. If the technology improvements were invented in the next several years, to impact the world’s energy demand it would take decades to implement. A migration to renewables would not be possible till after 2050. So where does that leave oil and natural gas?
This interview on Bloomberg was very interesting on many fronts. Francisco points out several reasons that oil prices could go over $100 barrel sooner because of the coal and natural gas shortages. How is that even possible?
While the path to our energy crisis was started decades ago, the collapse of the just-in-time manufacturing in our supply lines has also broken down. Manufactures in Europe and Inda are being shut down as fossil fuels are being redirected to power plants for consumers. The manufactures are not able to buy power cheap enough to even manufacture their products. So some are shutting their production lines down as it would cost 20% to 26% more than they could sell the products. Thus causing demand rationing.
In the United States, we are not going to see the gigantic natural gas prices in the European markets. We will see prices in the $7.20 to $9.00 natural gas this winter, and oil hitting $100 before the end of December. The Cushing inventories dropped about 2 million barrels to the lowest in 3 years, with forecasted production not being able to keep pace with demand increase.
The solution for a problem that started decades ago will not be fixed in a year or two. The King Operating research team is looking at the total energy crisis to get a better understanding of the timelines. In January we had called for $90 and $100 this year, and people were skeptical.
The Bottom Line
The United States oil and gas supply lines cannot replenish the depleted inventories to even keep up with demand. With the number of drilled but uncompleted wells (DUC) wells at 6,521 in May, this year is down 26% from May 2020. This reduction in DUC wells is an indication from other cycles that drilling costs will be going up over the next few years.
Reuters put out this morning that the Japan-Korea-Marker (JKM) is a benchmark in the spot market in the region has surged to $56.32 per mmBtu. The demand from China has caused the entire Asia market to also follow Europe in their natural gas pricing crisis. This will impact the United States as the LNG exports will continue to find plenty of buyers.
While there are many factors that are now influencing pricing matrices for oil and gas, the supply and demand are the easiest to follow. And those are extremely obvious for a price increase. It is the replenishing for supply matrices that will be a determining factor on how high the prices will reach. All indicators are showing that it will take years to catch up.
And yes we may see a country-wide increase in our power bills this winter. Will it hit 50%? Too many variables to call that number, but look what happened to ERCOT in Texas this year.
Buckle up, we are in for some interesting times ahead.
Send me your thoughts and I would like to hear from you about your thoughts on the current market.