Rumors vs realism

Rare olive branch from Fed official lifts oil from fears of oversupply

Steve Sutherlin

Petroleum News

Alaska North Slope crude rose 73 cents Nov. 22 to close at $90.15 per barrel, while West Texas Intermediate jumped $1.22 to close at $80.95 and Brent gained 91 cents to close at $88.36.

The cautious rally followed an important note of dissent against the chorus of hawkish voices from Federal Reserve officials promoting higher interest rates in the interest of choking the economy into a lower rate of inflation.

(See production graphic in the online issue PDF)

San Francisco Fed President Mary Daly said in a Nov. 21 speech that as the Fed makes decisions on further rate adjustments, “it will be important to remain conscious of this gap between the federal funds rate and the tightening in financial markets.”

“Ignoring it raises the chances of tightening too much,” she said, adding that although the official range on the fed funds rate is 3.75% to 4%, financial markets are behaving as if the rate is 6%.

Overlooking the lag time in policy could lead the Fed to boost rates when it needs to wait for earlier hikes to work their way through the economy, Daly said.

“This is especially important as we move into the next - and in many ways more difficult - phase of policy tightening,” she said.

In Nov. 21 trading, markets survived a jagged midday plunge that took WTI as low as $75.33 on a rumor that the Organization of the Petroleum Exporting Countries and its allied exporting nations were considering proposing a production increase of 500,000 barrels per day at the group’s Dec. 4 meeting. The boost would take effect in January if ratified and would coincide with the planned European Union embargo of Russian oil.

After the story was reported by The Wall Street Journal and other publications, Saudi energy minister Prince Abdulaziz bin Salman said the reports were false, and that in actuality it was a production cut that was on the table.

Once the Saudi official quelled the rumor, oil prices sliced upward as sharply as they fell.

WTI bounced back to close at $79.73 Jan. 21, down 35 cents. Brent, which plunged as low as $82.38 on the OPEC+ rumor, recovered to close at $87.45 - up 17 cents. ANS closed at $89.42, notching a gain of 24 cents.

Nov. 18 price action capped off a three-day slide precipitated by worries over COVID-19 lockdowns in China. ANS fell $1.76 on the day to close at $89.18, as WTI dropped $1.56 to close at $80.08 and Brent shed $2.16 to close at $87.62.

ANS slid $2.85 Nov. 17 to close at $90.94, as WTI plunged $3.95 to close at $81.64 and Brent slid $3.08 to close at $89.78.

From Tuesday to Tuesday, ANS lost $5.19 per barrel from its Nov. 15 close of $95.34 to its close at $90.15 Nov. 22.

As Petroleum News went to press early Nov. 23, WTI and Brent were lower in Asian trading.

The United States and its allies may agree Nov. 23 on a level for a price cap on Russian oil, with officials discussing setting it at around $60, according to people familiar with the talks, the Wall Street Journal reported late Nov. 22.

A dose of realism

“Total consumption of energy is rising,” Mills said in remarks to the Resource Development Council’s Alaska Resources Conference in Anchorage Nov. 17.

Wind and solar combined today provide about 3% of the world’s energy, Mills said.

“That doesn’t look like a transition,” he said. “It doesn’t look like an acceleration.”

Mills said mankind still uses a lot of the world’s oldest energy sources.

“The world’s oldest nonhuman energy source is burning wood,” he said. “The world today burns about as much wood as it did 5200 years ago, in fact, globally the world gets three times more energy still from burning wood as wind and solar combined.”

America has managed to transition more rapidly away from burning wood, he said, adding, “We’re a wealthy country and we get about 4% of all our energy from wind and solar and only 2% from burning wood.”

In Europe, the burning wood category is accelerating, and Europeans are burning coal directly in homes because of the energy crisis brought about by the loss of oil and natural gas supplies from Russia, he said.

When looking toward the future and evaluating the prospects of an energy transition, “the data matters, especially the language,” Mills said. “Accelerate from this point forward - what would it take in dollar terms?”

“In the last 20 years, the Western World - Europe and the United States - spent about $5 trillion on things other than hydrocarbons.” he said. “$5 trillion, even in Washington where I’m from is real money, still, $5 trillion has taken the world share of hydrocarbons from 84% to 82% or so - a 2 percentage point decline for $5 trillion and change.”

Over that time, the world’s consumption of energy has increased in absolute terms, he said.

“We’ve increased consumption of hydrocarbons in the 20 years we’ve been trying to abandon hydrocarbons,” he said. “The world is using a lot more of everything; we’re going to have a lot more of everything in the future.”

There will be more wind and solar, more batteries, more electric cars, more oil and more gas, Mills said, adding that OPEC’s most recent forecast said 2030 world oil demand will be not lower, but 10 million barrels per day higher.

Mills said the International Energy Agency in its projections imagines a future where the world spends lots more money on energy than it is currently spending, both by mandate and taxpayer subsidies.

“The IEA imagines that two things will happen in the next 20 or 30 years: the world economy and population will grow, and world energy consumption will stagnate,” he said. “So, for the first time in all human history, population and wealth will grow, without energy consumption growing.”

“I wouldn’t take that bet; I think it won’t happen, but okay, this is the assumption,” he said. “By the way they hedge the assumption by pointing out that this will require - and I am quoting with air quote - ‘changes in behavior.’”

“That will require a limit in the number of vehicles a household can own - that kind of change in behavior,” Mills said. “That’s the kind of thing they mean and they’re right.”