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Hike in oil and gas prices: US main beneficiary

Hike in oil and gas prices: US main beneficiary

Oil production in the United States rose to nearly 12 million barrels per day (b/d) in August 2022, the highest since the onset of the Covid-19 pandemic; even as shale companies have said they do not see production accelerating in coming months, according to Reuters.

US crude prices have hovered around US$85/barrel after surging into triple-digits this year and boosting fuel costs for consumers. President Joe Biden has called on oil companies to boost production to reduce fuel prices.

Overall US output peaked at 13 million b/d in late 2019, and has not returned to that level since the pandemic started as rigs have been shut in and as costs for equipment and labor increased rapidly.

Several US shale producers recently said well results are disappointing, and production is falling short of forecasts.

“You’ll see production tick higher, but I don’t think we’re going to go ripping higher to 13.1 million barrels,” said Bob Yawger, Director of Energy Futures at Mizuho in New York.

A little over two years after the pandemic wreaked havoc on demand and slashed profits, four of the five largest global oil companies brought in roughly US$50 billion in net income in the most recent quarter.

Most oil majors and listed producers are focused on returning profits to shareholders through share buybacks and dividends.

US upstream oil companies are expected to bank a 68% increase in free cash flow per barrel in 2022, while output growth lingers at 4.5% year to date, Deloitte said last week.

Crude production rose 0.9% to 11.98 million b/d in August, the highest since March 2020, the US Energy Information Administration (EIA) said in monthly figures.

Natural gas production in the United States hit another record, with gross output in the lower 48 states rising 0.6 billion cubic feet per day (Bcf/d) to 110.6 Bcf/d in August. That topped the prior all-time high of 110.0 Bcf/d in July.

In top oil-producing states, monthly output rose 1.6% to 5.10 million b/d in Texas and 0.6% to a record 1.58 million b/d in New Mexico but fell 0.5% to 1.06 million b/d in North Dakota. Texas’s output is at a level not seen since April 2020.

In top gas-producing states, monthly output rose 0.9% to a record 31.3 Bcf/d in Texas and fell 1.5% to 20.4 Bcf/d in Pennsylvania, the lowest since November 2020.

Oil tanker market

As the cliché goes, “the tanker sector is on fire.” Charter hires have reached stratospheric levels on the back of longer voyages for crude oil and for refined products, as well as small and large gas carriers.

The team at Deutsche Bank — Amit Mehrotra and Charles Robertson, who has recently joined — put it nicely, “Looking ahead, we expect continued strength in the tanker segment into next year, especially in light of upcoming EU sanctions against Russian crude and refined oil products imports. We believe minimal fleet supply growth coupled with expanding ton-mile demand for tankers will result in stronger rates for coming quarters.”

An important index of tanker health is the Baltic Dirty Tanker Index (BTDI), which has surged from just under 1,500 points to over 1,800 points during October. Researchers at tanker broker Poten have pegged period hires for economical VLCCs at US$47,500 per day for one year, end 2023, and US$39,000 per day (end 2024) for two-year periods. Spot hires for VLCC’s in the BTDI, for AG to the Far East was estimated to be north of US$70,000 per day

The listed equities have responded in kind. International Seaways, which the Deutsche Bank analysts had placed a target of US$40 per share on around October 10, 2022, when they began coverage, has been a standout. With INSW having now reached above this target in less than three weeks after starting to follow it, the analysts have now moved the target up to US$50 per share, based on cash flow estimates for 2023- 2024 being revised upwards. Each new pricing pinnacle represents an all-time high for the tanker owner, with its previous highs set in early 2020 at around US$30 per share.

Importantly, the Mehrotra/Robertson duo says, “We believe INSW shares are now trading above net asset value (NAV).” Other owners have also noted the owner’s strength. Besides a prescient investment in INSW by Frontline in late April, which has now nearly doubled in value, investors tied to insiders Ofer and Navig8 both took stakes during October.

The potential for dramatic increases in demand for handling Russian oil export oil movements is bolstering tanker optimism as origins and destinations begin a big pivot in the wake of sanctions, and, possibly, price caps on oil moving out of Russia.

One extreme trade rearrangement boosting ton-miles, cited by one news service contemplated that oil from eastern Russia was being supplanted, in the case of several cargoes recently fixed hauling Brazilian crude into China.

Once the sanctions begin, observers expect that what’s euphemistically known as the fleet of shadow tankers or dark tankers will haul at least a portion, but not all, of the Russian crude to buyers, complemented by owners staying out of the European Union trades.

Analysts at shipbroker Braemar who looked at projected export volumes against available Russian and Russian-trading tankers still came up with a deficit. Their calculations suggest a shortfall of 110 tankers (mainly Aframaxes and Suezmaxes) needed to haul Russian crude if volumes remain around 3.5 million barrels per day. Brokers Gibson, while not putting a number on needed vessels echoed a similar notion of a shortage, and, said that if the Russian trading fleet is undersupplied.

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