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Energy: The Good, The Bad, and The Ugly

Even though energy is my specialty, I hadn’t intended to write about the topic again this week. However, recent events in the oil and gas sector are so significant, they compel me to once again focus on energy.

The stakes are enormous not just for energy, but for investors of all stripes. The fortunes of the energy patch and those of Wall Street are inextricably linked.

In the U.S., the energy industry supports more than nine million jobs directly and indirectly, which is over 5% of the country’s total employment.

According to recent statistics from Goldman Sachs (NYSE: GS), the energy sector accounts for roughly one-third of S&P 500 capital expenditures and roughly 25% of combined capex and research and development spending.

As I’ll explain, the latest news in this vast industry is a mixture of the good, the bad, and the ugly.

The EPA Declares War on Farmers

On the domestic front, the Environmental Protection Agency (EPA) released its proposed Renewable Volume Obligations for the U.S. biofuel mandate. The big news was that the EPA effectively reduced biofuel blending volumes by not reallocating volumes that had been waived due to hardship waivers granted by the agency.

The EPA also broke with precedent by refusing to allow comments on the decision not to reallocate. Scott Irwin, an agricultural economist at the University of Illinois, wrote on Twitter that this amounted to a declaration of war on corn/soybean farmers. Within the Trump administration, USDA Secretary Sonny Perdue also criticized the decision.

EPA Administrator Scott Pruitt has never been a fan of the Renewable Fuel Standard (RFS), and his agency will undoubtedly be sued over the decision.

Further, Pruitt has numerous critics inside and outside the “Washington Beltway” that would like to see him removed. Replacing him with a different EPA administrator might result in an entirely different outcome for biofuel producers. Until then, score this one as a win for refiners.

But that wasn’t the biggest news of the week.

OPEC Underwhelms Investors

Oil prices rose last week to the highest levels since 2014. What was behind this price surge? Ironically, it was an announcement by OPEC that it would increase production.

Oil prices had weakened over the past month following a call from President Trump for OPEC to increase production in response to rising oil prices. After rising above $70 per barrel in May, the price of West Texas Intermediate (WTI) had dropped back to $65/barrel leading up to OPEC’s June 22 meeting.

It was widely anticipated that the group would decide to bump output at the meeting. At the meeting’s conclusion, OPEC and its influential non-member partner Russia announced that the cartel would increase production for the first time since implementing production cuts in November 2016.

But WTI rallied by more than 4% following the announcement. Why? Because the market was underwhelmed by OPEC’s decision. The bad news is that OPEC’s move won’t re-balance the market.

OPEC announced that it would restore about one million barrels per day (BPD) to the market, beginning this month. Iran had opposed the move, partially in protest of sanctions from the Trump administration. In reality, the output increase isn’t expected to exceed 700,000 barrels per day because some members are already pumping at maximum capacity.

Further, this output increase won’t be enough to stabilize an oil market that still seeks equilibrium. The most recent Oil Market Report (OMR) from the International Energy Agency (IEA) projected the amount of oil that would be needed by OPEC through 2019 to balance the supply-and-demand equation:

By the end of this year, the call on OPEC is expected to be nearly 1.5 million BPD more than they were forecast to produce. Consequently, even if OPEC managed to follow through on the full output increase, it would be insufficient to prevent further declines in global crude oil inventories. Expectations that this production increase won’t be enough to stabilize these inventory levels are the primary driver behind last week’s oil price surge.

Also bear in mind that Saudi Aramco is still planning its initial public offering (IPO). Saudi Arabia would like oil prices to remain elevated, while appeasing President Trump. OPEC’s action potentially satisfies Trump’s request while ensuring that oil prices remain strong.

Oil prices surged again on news that the U.S. was pressuring its allies not to import oil from Iran, lest they risk sanctions. Iran currently exports 2.9 million BDP of crude oil and condensate to Asian and European markets. Even if there is modest compliance with this Trump administration request, it could accelerate the depletion of global crude oil inventories. That would likely drive oil prices even higher.

That would also make U.S. oil producers happy. Refiners, on the other hand, would likely suffer. Higher oil prices erode the margins of refiners, resulting in lower profits. So even though refiners welcomed the good news on biofuel mandates, the spike in oil prices will probably have an ugly impact on earnings in the short term.

It’s not just the energy sector that’s getting roiled by uncertainty. So far this year, the broader equity markets have been on a roller-coaster ride, too. But my colleagues over at Radical Wealth Alliance have developed a time-proven investment system that doesn’t care about the direction of the markets. Their technique makes money in bull or bear conditions, in good economic times or bad, when markets are volatile or calm.

investing daily



13 Comments on "Energy: The Good, The Bad, and The Ugly"

  1. Fred on Tue, 3rd Jul 2018 8:09 pm 

    “makes money in bull or bear conditions, in good economic times or bad, when markets are volatile or calm.”

    Sounds like an ad.

    Why would one invest money to make more money instead of actually contributing something positive to society with their time and energy in a world on the brink of financial and environmental collapse?

  2. Duncan Idaho on Tue, 3rd Jul 2018 8:32 pm 

    Why would one invest money to make more money instead of actually contributing something positive to society with their time and energy in a world on the brink of financial and environmental collapse?

    It is the plight of the modern capitalist– smart enough for the con, but too stupid to realize the results.

    Of course, sociopaths haven’t a clue.

  3. Cloggie on Wed, 4th Jul 2018 12:27 am 

    “Nuclear energy in the US will be phased out”:

    http://www.spiegel.de/wissenschaft/technik/usa-atomausstieg-kommt-wohl-aus-kostengruenden-a-1216353.html

    In Germany the “Atomausstieg” (departure from nuclear energy) happened shortly after Fukushima and is irreversible.

    Now the same thing is happening in the US. A team around Granger Morgan of the Carnegie Mellon University has concluded that the more than 50 nuclear power stations are too old and have too high operational costs. It is being out-competed by cheap natural gas and solar and wind.

    In contrast to Germany, where there is strong resistance from the public, in the US people don’t care about risks or environmental damage. Here cost is the determining factor. And it is working against nuclear. The study claims that this will apply to most countries world-wide, with a few exceptions, like China. In South-Carolina, recently two projects that were 40% completed, were abandoned ($9B). Vogtle, Georgia, same story. Cost: $25B, increases likely.

    Origine study: http://www.pnas.org/content/early/2018/06/26/1804655115

    The authors deplore this development because the US is losing a source of energy that at least has no CO2-emissions. According to the authors it will take a carbon tax of $100/ton CO2 to make nuclear competitive again.

    The authors don’t like it but fear that in the coming decades zero new nuclear power plants will be built.

    Nevertheless, the authors expect a small increase in global nuclear power share, because of the feverish activities of the Chinese (and the UK), in connection to nuclear weapons programs. The same motivation, unfortunately, have Iran, UAE, Turkey and Egypt. For them solar energy would be much cheaper.

    But globally real energy source growth is found with natural gas and most of all renewables.

  4. MASTERMIND on Wed, 4th Jul 2018 12:49 am 

    Clogg

    Solar and Wind produced less than one percent of total world energy in 2016 – IEA WEO 2017
    https://www.iea.org/publications/freepublications/publication/KeyWorld2017.pdf

    All solar and wind do is give hope to naive people..The numbers speak for themselves..

  5. MASTERMIND on Wed, 4th Jul 2018 12:57 am 

    Clogg

    You can go fuck yourself and your stupid ConservaSHITS agenda…

  6. Cloggie on Wed, 4th Jul 2018 1:28 am 

    “Solar and Wind produced less than one percent of total world energy in 2016 – IEA WEO 2017”

    Europe is not “the world”, you egalitarian, Marxist bumpkin.

  7. deadly on Wed, 4th Jul 2018 5:38 am 

    Why would one invest money to make more money instead of actually contributing something positive to society with their time and energy in a world on the brink of financial and environmental collapse?

    When you buy a tank of gas to drive your old 2000 Honda that makes 35 mpg to haul your sorry worthless hide to get to work, doesn’t matter where the work is, you are investing money, purchasing gas, to go out and make money.

    You could be a medical professional, so your ride will probably be a Maserati, not some junker like a Tesla. lol

    You’re not going to see Warren Buffett mowing lawns and running a lawn mowing and snow removal business.

    Every day is an environmental disaster, you wake up and see the carnage, drink a cup of coffee, eat your breakfast, read the newspaper, strike that, spend time on the internet, then off to work to prevent collapse.

    It has been that way ever since China was discovered by North American migrants walking the Bering lowlands and into Russia, move in a southward direction and establish Shanghai.

    Today, you still do the same doggone thing, you work to prevent environmental devastation and economic collapse.

    If you don’t do something, it will be environmental devastation and economic collapse. You’ll most likely be dead sooner than later.

    To keep from dying too soon, you invest dollars earned, you will live longer and prevent working yourself to death.

    It’s called ‘capital’, accumulated assets.

    Been that way ever since Adam knocked up Eve.

    It is not rocket surgery.

  8. Antius on Wed, 4th Jul 2018 10:38 am 

    “Nuclear energy in the US will be phased out”
    “Now the same thing is happening in the US. A team around Granger Morgan of the Carnegie Mellon University has concluded that the more than 50 nuclear power stations are too old and have too high operational costs. It is being out-competed by cheap natural gas and solar and wind.”

    https://oilprice.com/Alternative-Energy/Nuclear-Power/The-Myth-Of-Expensive-Nuclear-Power.html

    ‘Lovering, Yip and Nordhaus (Science Direct April 2016) reviewed construction cost data for 349 reactors in the U.S., France, Canada, West Germany, Japan, India, and South Korea, encompassing 58 percent of all reactors built globally, and concluded that there is no inherent cost escalation trend associated with nuclear technology. There is however a vast variation in construction costs from one country to another. Some countries like the U.S., Canada, Japan and W Germany responded to the Three Mile Island accident by imposing regulations that pushed construction costs through the roof, while France, S Korea and India did not. S Korea and India are still able to deliver nuclear power stations for $2 billion / GW ($2010) installed capacity which remains a small fraction of the capital cost of solar PV.’

    Regardless of how good something has the potential to be, it will always be possible to run it into the ground.

  9. Dave Thompson on Thu, 5th Jul 2018 5:35 pm 

    Listen to this for all truth. https://youtu.be/KkM71JPHfjk

  10. Cloggie on Sat, 7th Jul 2018 1:32 pm 

    Baidu-China starts mass production of self-driving bus:

    https://youtu.be/3hFKIKU5R6U

    https://en.wikipedia.org/wiki/Baidu

  11. MASTERMIND on Sat, 7th Jul 2018 3:38 pm 

    Clogg

    Enough with your fantasy land of self driving cars..You are a total dimwit..

    I can’t wait till your government collapses and someone bashes your face in with a brick..

  12. Cloggie on Sat, 7th Jul 2018 3:43 pm 

    I can’t wait till your government collapses and someone bashes your face in with a brick..

    Actually, I can’t wait until “my” government of multicult US cock suckers collapses as well. We seem to have converging interests here, although I can’t escape the impression that you formulated your wish after you had been hit by a brick yourself.

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