The commentary on oil reflects the opposing views that OPEC+ capacity is looming and that every piece of incremental negative demand news is frightening, versus that OPEC+ is disciplined and wants higher prices, resulting in every incremental positive being welcomed. We are firmly on the side of higher oil prices as we cannot see any stakeholder in oil wanting anything except opportunity profits for as long as it may last from here.
Source: EIA, June 2021
The natural gas data in the exhibit above is a good example of what we are suggesting could happen – natural gas prices are at 5-year highs for the time of year, we have a heatwave in the US which is depleting inventories and LNG demand is extremely strong, and yet the rig count number is very low – improving as the chart title reflects, but well below where it should be with natural gas a $3.2 per MMBTU. As with oil, we are seeing more caution in the US E&P space in part because of stricter capital spending limits from the majors because of shareholder pressure and in part because of higher borrowing costs. We understand the pressure on the oil sector and why it is spreading to natural gas, but this is a bad move, both for US net-zero ambitions and global ambitions, as higher domestic natural gas prices in the US will impact LNG economics and especially the economics of new facilities, which are needed as part of the global energy transition process. While some are commenting correctly that higher oil and gas prices will encourage the move to renewable energy, we believe that the ability to build renewable power will be the rate-determining step in this evolution and not the economic incentive, although more of an incentive could help cover the materials inflation that we expect – see the ESG section in our daily report today.