Demand for oil “relatively resilient” even with the delta variant: analyst

Stewart Glickman, CFRA Energy Equity Analyst, joins Yahoo Finance to discuss the state of the energy market.

Video transcript

JARED BLIKRE: WTI crude oil topped $ 82 a barrel today, the highest prices since 2014. Meanwhile, US natural gas futures have risen above their level – in fact doubled over the course of the last year. And with no end in sight, many energy markets around the world are at record highs.

We want to talk about it with Stewart Glickman, energy equity analyst at CFRA, as well as Karina Mitchell of Yahoo Finance. Stewart, thank you for joining us. We were just talking about it with the previous guest. Can you give us an overview of this energy situation, how we got there? It seems like a perfect storm right now.

STEWART GLICKMAN: Yeah, Jared, thanks for having me. So on the supply side it’s really, I would say, the biggest driver in the short term. You have Hurricane Ida, which destroyed about 1.5 million barrels a day of US oil production. This compares to about 11 million barrels per day on average for the United States. You have blackouts in Europe which take away a large part of the natural gas supply from that market.

Some fuels have switched from gas, natural gas to crude oil, which only increases demand. And demand in general is back after a terrible year 2020. You know, the onset of the pandemic saw demand for crude oil drop from about 9 million barrels per day to about 91 million barrels per day in absolute terms. . And now we’re going back to about 96, 97. And so, you know, even with the delta variant, demand seems relatively resilient. And that is why we are in this position that we have. We have too many clients chasing too few barrels.

KARINA MITCHELL: So tell me, how much of the price gains that you see are actually healthy gains? So you’re talking about this crisis that happened last year, you know, the biggest one since World War II. And now we are back in a rage. Natural gas prices have increased by about 700%. How far are we facing healthy gains over inflation here?

STEWART GLICKMAN: Yeah, so I think on the gas side, a lot of what we’re seeing is really blackouts, like lack of supply that’s driving prices up dramatically. I mean, your previous guest pointed out that gas has gone up 5 times this year. It is not the normal growth in demand that is the cause. That’s a lot of shortages.

And with gas prices, the level they are at in both Europe and Asia, this is a huge boost to demand for LNG from states. Even with natural gas here at 5.50 per million BTUs, which is really expensive compared to what we experienced in years 2 and 3, there is still a lot of money to be made by taking this gas out of the way. United States and shipping it overseas.

Now on the oil side, I think a lot of that improving demand is really a relatively healthy recovery. And certainly, you have a price increase which is a function of Hurricane Ida and its impact on the United States. But I would say for the crude oil markets in general, it’s largely, I would say, a recovery game that drives prices up.

JARED BLIKRE: Well, Stewart, since you are a stock analyst, I have to get your thoughts on which stocks you like here or maybe any set of stocks you don’t like.

STEWART GLICKMAN: We are therefore definitely positive about the E&P space. Most independent producers will generate a considerable amount of free cash flow at $ 80 a barrel. That’s, you know, last year WTI was only costing about $ 40 a barrel on average. And everyone was closing the hatches and really focused on trying to survive a terrible market. What they are doing with that money this year, they are paying off the debt they incurred last year, they are increasing their dividends, they are increasing the buyouts.

What’s remarkable is the relative absence of new spending on bio – spending through the forest to try and increase production, because the industry has been told for almost seven years now, don’t don’t talk to us about growth. Tell us how efficient you can make your portfolio. And value this portfolio and generate more cash flow. And so the industry is sort of following that up.

I think the middle space should see huge demand as well. Much of this additional demand comes from foreign markets. You have natural gas liquids that have to be … you have to take this raw mixture and turn them into their purity products, like propane and ethane. Intermediate players are well placed to help and send these purity products overseas.

The only area I’m not really a fan of right now is downstream refining. I’m worried that, you know, when you have Hurricane Ida and its influence on US oil production, I’m worried that the Brent WTI spread will compress further. I think the consensus estimates right now are for a spread of around 350 a barrel between Brent and WTI in 2022. And I’m afraid it’s a little narrower than that. And that could weigh on the margins.

But in general, you know, you have names like EOG Resources, Pioneer Natural Resources, Devon Energy, all of them are going to generate a lot of free cash flow. In 2022, there will be some compensation if you overcovered your future production next year. But for the most part, companies covered less in ’22 than they have to report for ’21.

KARINA MITCHELL: So tell me, where does the offer go from here? Do you see it drying up? OPEC says it is no longer releasing crude. What happens in the future and how far do these prices go?

STEWART GLICKMAN: Yeah, that’s a great question, Karina. The OPEC consortium has been remarkably stubborn in not getting the barrels back to market faster than the market demands. I think they’re profiting … you know, they’re definitely profiting at $ 80 a barrel for the first time in about seven years.

And they’ve been very determined about it. It is easy to be determined or easier to be determined when oil prices are low. It is more difficult to avoid this temptation when oil prices rise dramatically. So I think OPEC risks cheating around the edges. But for the most part, it seems like they’re still pretty strong on this.

And on the American oil community side, you know, investors have been talking about space for almost seven years, come together and stop selling us a growth story that’s really deaf to what we want and what the United States oil community – excuse me, what the American investment community is asking for is, you know, higher cash flow. Then with that you have the ESG community saying we need to prepare for a transition so stop telling us how much fossil fuel output you would like to give us.

And so the industry kind of followed suit from that. And until they start getting different messages, I think they’re going to be pretty reluctant to expand production much because they have other fish to whip up.

JARED BLIKRE: And we’ll stop there. Stewart Glickman, CFRA energy equity analyst. And Karina, stick around. We’ll talk to you later on the show.

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