The Master Resource
October 20, 2022
Before its entrance into World War II, the United States transported most of its crude oil by tanker ship from the oil fields in Texas to the industry hubs in the northeastern part of the country. Once the war started it quickly became apparent that energy was firmly in the crosshairs of the enemy.
On April 10th, 1942 the ship “Gulfamerica” was making her maiden voyage from Port Arthur, Texas, to New York. Around 10 pm that evening, Gulfamerica was cruising across the dark ocean silhouetted by the lights of Jacksonville, Florida, when a torpedo fired from the German submarine U-123 struck her #7 tank on the starboard side. The German U-Boat then opened fire with her deck gun, firing 12 shells into the engine room on the port side. The ship was sunk. In total 19 men were killed in the attack.
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Oil tankers were an easy target for the German U-Boats. The goal was to cause fear on the mainland and disrupt the critical supply of crude oil to America’s industrial complex. It worked.
Insurance companies stopped offering coverage for American ships. American industry was paralyzed during a time when the country was desperately trying to ramp up war materials production.
The U.S. Government knew that decisive action had to be taken to shore up energy security for the country. In the spring of 1942, oil industry executives met with government officials and crafted the “Tulsa Plan.” The objective was to build the largest pipeline project ever attempted.
There were two pipelines planned, the “Big Inch” and the “Little Big Inch.” At the time the new oil pipelines were to be the longest ever built at 1,475 and 1,254 miles long respectively, needing 35 pumping stations to move the product from the Gulf to the Northeast. For the project they had to invent a new design to create a larger diameter of pipe. It was considered an engineering marvel of the times.
The project was the largest public-private partnership ever attempted. Public support for the pipelines was garnered through government propaganda showing the benefits to the country of the U.S. oil and gas industry. Including depicting oilfield works as comic book superheroes.
In 2022, it’s hard to imagine Western governments undertaking a project like this in the current political environment that is hostile to virtually all new types of critical energy infrastructure. In fact, we see the opposite happening.
Even with the largest European ground war since WW2, and critical energy supply being cut, politicians (on both sides of the pond) are still advocating for stifling new energy infrastructure projects to support the region.
Eerily similar to the U-Boats blowing up oil tankers, a mysterious actor recently sabotaged the Nord Stream pipeline, severing (likely permanently) gas supplies from Russia to Germany. Regardless of who attacked Nord Stream, it is clear we are at the stage of war where energy infrastructure is under attack.
It has been estimated that for every barrel of oil produced there is 25,000 man hours of work equivalent. Assuming a man hour of work is worth $20/hr, the value of a barrel of oil to the global economy is $500,000. As Luke Gromen puts it, energy is the master resource.
During this period of historic inflation, driven in part by rising energy costs, now would be the time to push for new critical infrastructure investments. LNG import/export facilities, new pipelines, refineries, gas and oil storage are all needed if we want to secure our energy future and lower consumer costs.
SPR releases, calls for price caps, and angry speeches targeting the oil & gas industry aren’t long term solutions, more likely these actions are making the problems worse.
Talk Energy Podcast
A recent guest on the Talk Energy podcast was Mark Mills. Mark is a senior fellow at the Manhattan Institute and a strategic partner with Montrose Lane (an energy-tech venture fund). Mark also served in the White House Science Office under President Reagan.
This episode we discuss the issue energy misinformation that is being spread in the media and by politicians. We talk about the limitations of the energy transition and what is actually working and what is science fiction. We dive into the issues facing renewables and electric vehicles.
Lastly, we discuss why when it comes to energy, the narratives dominate, but ultimately the facts matter.
Hope you enjoy the show!
Energy Market Update
Today, WTI traded above $88/bbl early before moving lower ($85.39 at time of newsletter), previously in the week WTI traded as low as $82.34/ bbl. The EIA report that was released yesterday shows crude production and exports back to the pre Hurricane Ian levels.
President Biden has released 180 mm bbls from the Strategic Petroleum Reserve this year. The current low SPR levels are concerning- during an emergency the SPR would only be able to supply 22 days of consumption. The White House credits lower prices due to the release. They plan to repurchase and refill the SPR when crude prices fall to $67 & $72/ bbl.
Many are speculating that President Biden will impose a fuel export ban in an effort to decrease prices. Refiners are concerned as they wouldn’t have enough local demand and correct blends that ultimately would cause refiners to decrease output.
The EIA Petroleum Status Report for the week ending October 14th, 2022 was released on Wednesday, there was a 1.7mm bbl draw from the previous week. Cushing storage increased another week by 0.6mm bbls. Refinery run rates are down to 89.5%. Crude production had a minor increase from the prior week to 12mm bbls. Crude exports increased back up to 4.1 mm bbls.
Please note, we have added and will continue to track the SPR storage below:
Rig Count Update:
The U.S. O&G rig count bumped by seven on the week to 888 (highest count since Nov 2019). Oil rigs increased eight to 683 while gas rigs lost one to 205. The Permian accounted for all of the gain and then some at 10. The basin is now at 357, 85 rigs higher year-on-year. The rest of the majors picked up a single rig or kept flat. The SCOOP-STACK with its one-rig gain is now at 50 total, a +13 change from a year ago.
After a strong opening over $6 on Monday, Natural Gas prices have been in a downward trend this week and settled in the mid-$5 range. It’s been a week full of sell offs and price corrections as the lack of tropical storm activity, rising storage numbers and moderate weather continues to put pressure on $7 pricing in the shoulder months. While Hurricane Ian did punch Florida in the mouth, tropical activity overall is forecasted to be the lowest in years which looks to correct the built-in price premium. As the cold front snaps this week and with a warming forecast ahead, weather looks to stay in the driver’s seat, reducing domestic demand more than expected. According to American Gas Association reports released early this month, natural gas production has already reached record levels in October, which has added further pressure on prices as demand is being met, while storage continues to build. With winter still on the horizon, look for the storage builds and record production to keep November in the bearish structure.
Warmer weather in the region has seen Midcon prices drop off. While Chicago city-gates lowered close to a $.20 discount to Henry Hub, ANR-OK dropped $.50 to $.42 off Henry Hub at $5.08 while NGPL-Midcon is $.50 back at $5.00. Both power and heating demand are forecasted to drop with temps expecting to rise. Heating demand looks to take the largest dip as S&P Global Commodity Insights suggests a decline to 14.3 Bcf/d while power demand could drop near 3.9 Bcf/d. The bearish pricing structure looks to continue with a forecast that puts Chicago temps in or around 60 degrees by week’s end.
The EIA released storage numbers this morning, coming in at 3,342 Bcf, representing a net +111 Bcf increase from the previous week. This increase was slightly below marketplace expectations of +115. Stocks were 106 Bcf higher this time last year, however, this week’s levels are still within the 5 yr. historical range of 3,525 Bcf.
Natural Gas Liquids (NGLs)
Mont Belvieu and Conway Ethane products were the biggest losers WoW, with current month prices down 14% and 19%, respectively. Isobutanes were not too far off of Ethane, losing 13% and 9%, respectively. All other products were lower on the week to the tune of 1-4%. Despite the lower prices, the per bbl prices compared to WTI didn’t soften too much, as the prompt month contract fell a few $ compared to same period last week.
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Odd coincidence: I owned a home in West Chester, PA and my property included an easement to the pipeline. After a long absence, Texas Eastern showed up to clear the right of way from vegetation. There were some 30 year old trees that needed to come down. For some, it affected their property value significantly but there was nothing they could do. I used it as an opportunity to get a couple extra trees removed for a small donation to the foreman.
This piece is a buffet of facts and information. Thanks for this.