226 - Is oil up or down? | Kunal Patel from Dallas Fed - Q1 Survey

Energy Week

Big Oil Has $150 Billion in Cash and Investors Want a Share

https://www.wsj.com/articles/big-oil-has-150-billion-in-cash-and-investors-want-a-share-b5cdea35

- oil companies sitting on cash now, but they may need that cash for when prices are lower

- should they return all this cash to shareholders now or keep it to pay out in dividends throughout the next cycle?

- what about needing cash to account for uncertainty in regulations?

Oil’s sharp slide has surprised markets. But some traders now see a bottom for prices

https://www.cnbc.com/2023/05/08/oils-sharp-slide-has-surprised-markets-but-some-traders-now-see-a-bottom-for-prices.html

- analysts have "feelings" that oil prices have seen their bottom

- what are the signs? expectation that US gasoline demand will be strong this summer? strong jet fuel demand? inventories? industry? Diesel demand? Chinese manufacturing data? Fed is done raising interest rates?

- OPEC is a big uncertainty. Will OPEC take action to cut production at its June meeting or keep production stable?

- Will OPEC members adhere to their voluntary cuts?

- Diesel numbers aren't good for demand

- Could hit summer driving season and demand goes up but then OPEC would need to hold production steady

- If Russia doesn't actually cut then oil prices could go lower when evidence hits market

Oil climbs almost 3% as recession fears begin to fade

https://www.reuters.com/markets/commodities/oil-prices-inch-up-recession-fears-begin-fade-2023-05-08/

- The fears aren't fading, they just aren't as bad as they seemed before.

- Was the price slide in oil really overdone?

- OPEC to release monthly oil report on Thursday?

No more gas stoves? New York is first state to ban gas in new buildings

https://www.csmonitor.com/Environment/2023/0505/No-more-gas-stoves-New-York-is-first-state-to-ban-gas-in-new-buildings

- "It’s part of a larger state plan to reach net-zero energy emissions by 2050" but the power plants will probably still be permitted to use natural gas

- "By 2026, most new buildings under seven stories will have to use electric heat pumps for controlling air temperatures and for hot water. Larger buildings will have to comply by 2029. Some businesses that require extreme high heat to operate are exempt."

- Heat pumps don't work that well. What will cities like Buffalo do?

- "The state’s energy cushion could narrow beginning in 2025 as some generators are deactivated and demand grows" according to New York's grid operator. Probably will not take older generators out of commission in order to continue to provide electricity.

Special Guest Kunal Patel from Dallas Fed - Q1 Survey

https://www.dallasfed.org/research/surveys/des/2023/2301

- 200 firms in 11th district registered

- data collected March 15-23

- Data suggest expansion in upstream over the last 2 years is stalling

- supply chain delays eased

- employment growth continuing but not as fast as before

- executives are not optimistic

- expect crude oil to end year at $80/barrel

- WTI at $73/barrel but breakeven is around $62/barrel: range of averages from $56 to $66. But that includes different regions, Eagle Ford, Permian, etc.

- most firms can profitably drill at current prices but last year breakeven was lower ($56/barrel). Large firms (10,000bpd or more) need $55/ barrel while smaller firms need less).

- Generally if executives think the price is currently in a good range they predict that oil will end the year at the same price. Last year they thought prices would come down. Now they think prices will go up.

- Question: What West Texas Intermediate (WTI) oil price does your firm need to cover operating expenses for existing wells? AVerage across sample is up by 10% from last year. Suggests increase in cost just to manage existing wells.

- Price to complete a DUC has to be between operating expenses and price to put well into production. Completion cost is generally 2/3 of the cost of the well.

- $70 oil but $2 gas -- is this an issue? Natural gas and natural gas liquids are seen mostly as an additional uplift. Cost of natural gas mostly impacts the just natural gas drillers.

- Push to reduce emissions by moving to electric power is impacting the area. Using electric powered turbines in fracing, for example. More wells mean more electricity needed but often they are away from civilization and its hard to get electricity.

- Anger towards BLM - especially regarding permitting rules. Even renewables are having trouble getting permits from BLM. Length of time to get permits is increasing.

- Costs continued to rise, but supply chain issues easing. Why? Activity was flat, so maybe supply chain caught up? no, equipment that was ordered a long time ago was finally delivered. Could costs be in labor?

Next report coming out June 22!

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