Crude Observations

Stop Pushing!

As an energy industry participant, investor, lover and hater I spend a lot of my time immersed in the minutiae of the energy industry, the oil price, its movements, the price of natural gas and its irrational gyrations and all the factors that push and pull these magnificent commodities in often infuriating and counter-intuitive directions on a daily if not hourly basis.


It is not uncommon for my business partner to have to turn off BNN because I am unhingedly yelling at yet another of the procession of uninformed talking heads they bring on to discuss the energy sector and pontificate and theorize why the price of oil is headed to $40 or $140. Sometimes I even yell at Twitter (note – this is different than arguing IN twitter) and I have such faith in oil price rationality that the oil and gas portion of my portfolio is called “Stu’s Portfolio of Doom”.


Regardless, the oil price is, as always, topical. And as the picture accompanying this brief missive shows, the price of oil is subject to many influences that tend to pull and push it in many directions at once.


So, I thought we should take a look at some of these. A lot of people like to use the terms “bearish” and “bullish”. They are indeed handy market terms, but their connotation is largely a positive vs negative one while in the case of oil and natural gas, low prices are actually just as good as high prices, but for different parties.


For this reason, I am more interested in looking at the factors that can push prices higher and compare them to the factors that can pull prices lower. At some point there must be equilibrium, right? Right? A sweet spot? A place where there is tension but stasis. Hence the push-me, pull-you. As opposed to the standard “Bull/Bear” narrative.


Plus, I really liked the Doctor Doolittle books as a kid. I mean he could talk to the animals!


But as always I digress. Here are, in my view, the top factors affecting oil and/or natural gas prices in the current environment and an assessment (guess really) whether that factor is likely to either push prices up or pull prices down. I may even, if you’re lucky, opine on which is in the ascendancy. We’ll just have to see on that one.


Note that if you are expecting a deep dive on data you are in the wrong place, I’m all about the qualitative today.




OPEC, plus or otherwise, or as I like to call it “Saudi Arabia and quasi-friends” is, as always, the largest single influence on the price of oil. They control close to 30% of production and have the ability to either flood the market with product to squeeze competitors out or withhold exports to force prices up. In the current pricing environment, Saudi Arabia and its partners are very much enjoying the elevated prices as it is allowing them to pursue the many absurd projects they have on the go. For the past few years, OPEC+ has been assiduously raising each member’s quota to ensure a stable amount of supply for the world and offset rising prices. Ironically, they have consistently failed to collectively and individually hit their quotas which has led many to opine that the myth of OPEC spare capacity is indeed a myth. During the recent price swoon, OPEC’s technical group met and cut quotas back by 100,000 barrels per day. On October 5th OPEC will have its formal meeting. If they don’t cut again then, I will eat my hat. The last thing OPEC wants is an oversupplied market while the rest of the world isn’t even drilling.


Push/Pull Rating? It’s always about OPEC. Pull.




Ah Russia. What the actual F are you doing. Russia is in the top three producers of oil in the world, typically behind only the Untied States and Saudi Arabia. Since the invasion of Ukraine, Russian oil production and exports have suffered. Estimates range between 500,000 and 2 million barrels per day but the data is sketchy. If we are to judge by the direction of prices, the market thinks a lot more barrels are leaking into market than sanctioning governments hoped for. Many of these barrels are going to China and India but a fair amount are backdooring their way into Europe via ship transfers. Barring any significant escalation in the Ukraine war or a giant spine growing in the EU, it is increasingly feeling like “this is the way it is going to be”. Russia sells what it can to whoever wants it, Europe gets its share, the USA looks the other way. If the G7 ever came up with a price cap, Russia would sell the same volumes, just to someone else.


On the gas side, Russia is in a much different position. The massive pipelines it is building to access the Chinese market are years away so their biggest customer remains Europe, Germany primarily, and they are using their natural gas to put the squeeze on the EU with the approaching winter as energy extortion to get sanctions removed. Currently, NordStream 1 to Germany is shut down and gas prices continue to soar. Long term, this is a disastrous strategy for Moscow. The EU and the rest of the world has far more wealth than brains so they will subsidize their way out of the short term problem and double down on a dual track renewables and green LNG strategy to neutralize the Russian gambit. Even if hostilities settle in the medium term and Russian gas is allowed back into Europe, this hammer has lost its effectiveness. The United Kingdom has already lifted its fracking ban and the EU could easily do the same. Europe and the UK have tremendous shale reserves, enough to neutralize Russia.


Push/Pull Rating? Oil? Push

Push/Pull Rating for gas? Short term pull, medium to long term push.




Iran is constantly in the news these days with the imminent renewal of the JCPOA being used as a major White House talking point to fool the markets into thinking we are about to see a flood if Iranian barrels imminently enter the market. Meanwhile, Iran is selling drones to Russia to assist its war efforts and continues to sponsor terrorists and militias in locations ranging from Lebanon to Syria to Iraq. Recently we have learned that any deal with Iran is not imminent at all and that their demands continue to change and they are bad faith negotiators. Go figure. Word to the market: Stop it. Those barrels aren’t imminent, and even if there were, there aren’t that many. Sure there’s floating storage, but Iran is already selling oil on the grey market to China, Venezuala and India among others. And it will cost literal billions of dollars and years to get its market up to the point people assume would happen on any deal. Plus they are part of OPEC and need foreign exchange to rebuild a disaster of an economy. Do you really think Iran is going to flood the market?


Push/Pull Rating: Stuck in the Middle (east) with you


North American Production


In 2007-2008, the last time energy prices went bananas, the shale revolution rode to the rescue with cheap and abundant natural gas being extracted in economy saving amounts from porous rocks from Texas to Arkansas to Pennsylvania while similar technology was used to suck billions of barrels of super light crude from horizontal seams across Texas, North Dakota and Canada. At the same time, the largest infrastructure spending frenzy ever seen in Canada took the oilsands from expensive curiosity to low decline factory style mega output. In the 2010’s the majority of oil production growth came from the United States and most of the balance came from Canada. In today’s price and physical environment that type of growth is impossible. I don’t care what anyone says. There isn’t enough money or will. The billions have been spent – in many cases vaporized and producers are in harvest mode. Even if the impetus was there, the manpower isn’t and I am unconvinced the resource is there for significant growth, except the oilsands. So incremental growth is going to be the order of the day. Reserve replacement. Managing depletion. Offsetting declines. Anyone waiting for North America to once again draw the attention of Saudi Arabia and OPEC, causing them to sewer the market and bankrupt an industry will have to wait. We can do that all on our own, thank you very much.


Push/Pull Rating. Producers are laughing all the way to the bank doing the bare minimum. Pull.


EU and UK economies


The rise in energy prices across the European Union and the United Kingdom has created a crisis that could have lasting repercussions for decades. Whether it’s the fear of de-industrialization across the continent, or the return of the feudal system as the peasants gather around the few energy rich duchies and burn wood to heat their homes and cook their pigeons, the direction of the European economies should be of major concern right about now. Fortunately, there will be no need for a Marshall Plan version 2.0, but the policy directions set today will determine how deep and how long the upcoming economic slowdown in Europe will last. Unfortunately, the need for massive stimulus comes at exactly the wrong time as the sudden increases in interest rates in the United States is pounding the Euro and limiting options for the European Central Bank. Energy policies to reduce the burden on energy users are fine, but it has to be paid somewhere and that money needs to be created. This is of course all inflationary and will require restraint to slow it down. Europe needs cheap energy now to save its economy. Renewables are going to take too long. Natural gas and LNG is really the bridge. Ironically in the UK the prospects are not as dire because the last few years of Brexit have already battered the economy into submission so there is really nowhere to go but up as long as they can source the cheap energy they need. The new Liz Truss regime seems to get this and is taking positive steps.


Push/Pull Rating. It could get ugly – definite Push


Interest rates and Inflation


Central banks across the globe are determined to crush inflation and nowhere is that being telegraphed more specifically that in the United States. Whether it’s a soft or a crash landing the reality is that central bank policy makers really don’t care that much how they get there, as long as people stop spending. Period. Will interest rates run to 4% and hold? Will the Fed see a need to run higher? Depends on the direction of inflation and will be independent of the economic effect. My own personal view is that the rate increases will stop at 4% and will remain there as a new normal for a long time. There is no stimulus coming. Asset values will continue to adjust accordingly which will slow spending but the effect on energy prices will be more muted that many expect as this is core spending.


Push/Pull Rating: Short term Push, long term Pull. 4% solution.


Mid term Elections


The theory that everything the Biden administration is doing is driven by the US Mid-Term elections certainly has a lot of momentum behind it. Whether it’s the attempted renegotiation of the JCPOA, the SPR releases conveniently timed to end a week before the elections or the Inflation Production Act – oops “Reduction” jammed through chock full of renewable subsidies and doodads, the agenda is clear. Reduce gas prices. Talk down oil and gas. Pump renewables. Reduce gas prices. There is no reason to expect that anyone will do anything to slow the momentum the Democrats have with respect to the number 1 pocketbook issue of most every voter. So expect more Iran, more cajoling of the Saudis, more talk of energy price relief, more musing about SPR releases daily until that fateful Tuesday in early November. After that, I suspect we may go back to a more predictable world.


Push/Pull Rating: 60-day all out Push. Dems have all the mo – post mid terms a different story.


Strategic Petroleum Reserve


The American Strategic Petroleum Reserve, located in the Canadian province of Alberta, has long been the security blanket the United States has needed to offset the inevitable oil shocks that come from an energy complex that relies on garbage dictatorships and theocracies like Russia, Saudi Arabia and Iran to maintain affordability. What? Am I saying the quiet part out loud? Okay fine. Look everyone knows that the Biden administration has been callously using the Strategic Petroleum Reserves for political purposes, authorizing the release of 180 million barrels of oil over 180 days leading to the mid terms in a desperate attempt to push gas prices down and save their electoral bacon. Many analysts, myself included, thought this was dumb and inappropriate use of the reserve, wouldn’t work and would just lead to higher prices when the SPR needed to be refilled. We were only partly right. It was inappropriate. Aside from that – it was political genius, has worked to lower prices and the Biden administration has no intention of refilling the SPR and creating artificial demand. While eventually the draws have to stop, the effect of an extra 1 million barrels per day of marginal supply has been more than sufficient to hold down the price of oil. That said, once the draws end, there will be an inevitable jump in prices as those barrels disappear unless of course Iran comes back into the fold or the Fed is successful in crushing the life out of the American economy by raising rates to levels that haven’t been seen since… (checks notes… really?) 2019, or at worst 2007. Hmm.


Push/Pull Rating: 60 day Push, unless it’s extended by people who don’t care what it’s for.


Rest of World Production.


Mexico? Declining. Africa? Years away and barely material. South America? Brazil always disappoints. The rest are minor players. Meh.


Push/Pull Rank? Does anyone have any real money to spend on exploration? Pull


Renewables and electrification


The ongoing electrification of everything in the world and the advent of electric vehicles is of course an unstoppable force (as long as battery tech keeps improving and, well, we can still get all the cheap minerals needed to make said batteries). And I am in no position to say it isn’t going to happen, particularly since I am in the market for one of these so-called zero emission vehicles. In addition, the relentless expansion of solar and wind energy will surely change the generation mix from 80% fossil fuel and 20% renewable to something closer to 75% fossil fuel and 25% renewable sometime around 2050 if not sooner. So the writing is on the wall for energy dense, cheap and abundant fossil fuels. Who needs to burn oil and gas when there is the sun, the wind and the forests to generate heat and electricity. Look, I’m being tongue in cheek. As long as governments are willing to spend the trillions required to upgrade the grid around the world, I am just fine with companies building as much renewable generation as possible, especially if it is subsidized and I don’t have to pay for it… directly. The long and short of it of course is that eventually, the cheap, yet dirty, energy dense power from fossil fuels will be replaced. If it’s from acres and acres of landscape destroying solar and super expensive batteries, so be it. I am down for that. But in the meantime, that pesky 80/20 world prevails.


Push/Pull Rating: Still not ready for top billing – it’s a pull.


Elon Musk


He thinks oil and gas is a necessary part of the energy mix for the foreseeable future. Whoop de doo. We KNOW that you charlatan.


Push/Pull Rating: Minor Pull, some people believe in him religiously. Maybe we can do a 6 for 1 split in the price of oil and magically make it go higher.




Last on the list and a veritable elephant in the room. China, for want of a better term, has been a pain in the ass for energy markets for the better part of the last two years. What they do going forward matters for the energy industry, both oil and gas. The largest investor in renewable energy in the world is also the largest emitter of CO2 and the largest and fastest growing consumer of coal. In addition, they are also pursuing their maddening COVID-Zero strategy which shuts down huge portions of their economy on a random rotating basis. If China ever gets its sh** together on COVID and really opens its economy with all the stimulus that seems to be in the cards, watch of for oil prices. Signs are emerging that this may be coming sooner than we think, with Xi firmly installed for another term and in fact taking his first trip abroad since COVID.


Push/Pull Rating: It’s a Pull, verging on Yank


In conclusion…


As always, I think it is apparent from the preceding where I sit. There are contrarian forces pushing and pulling the market all over the place, which is leading to the disproportionate volatility. On balance though, I think the “pull” of scarcity, energy insecurity, continued demand growth in emerging economies and the time to transition “trumps” the downward pull of Russia and Iranian supply, the ongoing electrification of the global economy, recession panic and Biden and the Dem’s efforts to polish their short-term electability. Prices are headed higher.


Which I guess for the short term makes it bullish for me. I like high prices, so does my portfolio of doom.


And from what I recall, Doctor Doolittle didn’t much care for talking to bears.






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