Category Archives: Oil Market

Why wars don’t move oil and defence stocks the way investors expect

Global Economy, Markets, Oil Market

Investing in oil companies as a “sure bet” when there is a temporary spike in crude is usually a challenging idea.

Why wars don’t move oil and defence stocks the way investors expect

Doing it during a war, when the destruction of demand can be much greater than the first jump in the commodity price, is even riskier. Recent history in 2008, 2018, 2022, and 2025 proves this.

Investing in oil companies must be based on fundamental analysis that is independent from the spot price of crude and natural gas and focused on value creation at mid‑cycle prices.

The key is not to jump on a short‑term wave that the oil companies themselves barely capture in their profits.

The SXEP index tracks European oil & gas companies that are highly sensitive to different businesses, expectations, investment cycles, and regulations, and in many cases, they are fundamentally refiners, not pure producers that capture the “spot” price of crude.

Continue reading Why wars don’t move oil and defence stocks the way investors expect →

Attack on Syria and the real risk for oil markets

Global Economy, Oil Market, On the cover

‘The question is not whether there will be a military action against Syria. The questions are “who?”, “What?”, and “when”? ‘ – SocGen Analyst

In 1973, Hafez Al-Assad was the president of Syria . Between that year and 1982 the regime conducted a systematic terror campaign against the opposition, which led to the slaughter of up to 40,000 people after the rebellion of the city of Hama. Al-Assad remained in power until 2000, when he was succeeded by his son, Bashar , the current Syrian leader. During all those years, outrage and international criticism of the regime always ended in many words and little action. Continue reading Attack on Syria and the real risk for oil markets →

Peak Oil Defenders’ Most Overlooked Myth: EROEI

Global Economy, Oil Market, On the cover

“So long as oil is used as a source of energy, when the energy cost of recovering a barrel of oil becomes greater than the energy content of the oil, production will cease no matter what the monetary price may be.”– M. King Hubbert

Yes, friends, if EROEIs of unconventional and new oil production were as low as some defend, the industry would simply abandon those resources.

Peak Oil defenders continue to make new claims. While inventories reach the highest levels of the past five years, OPEC fights to keep quotas and for a third consecutive year reserve replacement remains strong, in a world that has not seen a single day of disruption in oil supply, the defenders claim that the problem is EROEI (energy returned on energy invested) and that therefore, it doesn’t matter if supply is abundant, because it is still negative.I had the pleasure of talking with industry leaders and this is their response.

eroeia) The concept of EROEI has to be clearly attached to profitability. Peak oil crash defenders scream at 4:1 levels as unsustainable. This is funny. An “alleged” low EROEI is not necessarily a negative in itself, given that low cost of capital and high technology developments have helped to have readily available and abundant energy all over the energy complex (not only in non-conventional, but in conventional resources), and there has been no issue with supply in any environment despite a few geopolitical bumps. Furthermore, that EROEI rises as efficiency and productivity help reduce power use and increase output.

b) The concept of EROEI is static, it uses an estimate of energy consumption that starts at an intensive point and that just stays or rises afterwards, and this has proven to be wrong (energy used per unit produced falls dramatically in virtually all industry projects, see Shell’s analysis of oil sands extraction).

c) If EROEI estimates published by peak oil defenders were correct, given the gigantic increase in E&P and non-conventional spending we have had, power usage, and electricity prices and gas prices would have rocketed… But they have fallen. Co-generation is barely considered by EROEI doomsters either.

More importantly, in projects as energy intensive as PNG LNG, cost of energy used has fallen by 34%.

In Oil sands we have seen drops of 25% per unit of production. In shale oil as dramatic as 34%. The graph below shows the EROEI estimates of the Department of Energy in 2006 (link here). This was in 2006. Since then the efficiency and lower use of power and energy in hydraulic fracking and oil sands extraction has significantly increased the EROEI.

d) EROEI is an excuse of peak oil defenders to justify that they have been wrong about supply, turning the debate to the alleged unsustainability of that same supply as a justification.

Finally, any of the peak oil defenders needs to explain how the development cost of the industry has fallen, the energy intensity of the industry has gone down dramatically (they don’t read companies sustainability reports?) yet reserves and production have improved 2006-2010, fundamentally in unconventional.

The EROEI theory takes an individual projection (and this is typical for peak oil), leaves the negative elements untouched and stable (as if techonology and resource development did not improve) and then expands it to the entire base.

This, obviously, leads to a massive generalization and a leap of faith that can be easily denied just looking at 20-F filings, detailed analysis per project, which are available to all shareholders in strategy presentations and Fact Books, and in the brutal fact that oil sector’s electricity and gas consumption has been falling while productivity, particularly in non-conventionals, has soared.

Never bet against human ingenuity.

Further read. The Oil Drum (link here):

On EROEI of oil sands

“EROI depends mostly upon the direct energy used and which alone suggests an EROI of about 5.8. Including indirect energy decreases the EROI to about 5.2”, “adding in labor and environmental costs have little effect”. “Nevertheless it appears that tar sands mining yields a significantly positive EROI”.

On shale oil “Reported EROIs (energy return on investments) are generally in the range of 1.5:1 to 4:1, with a few extreme values between 7:1 and 13:1”. “Tar sands and oil shales seem to be in the same EROI ballpark”.

EROI_oilsandsNote from Daniel Lacalle: Worth noting that the assumption of energy consumption in the article for shale oil is now widely seen as excessive, so real EROEI is currently close to the latter part of the analysis (7x to 13x)

Further read:

http://energyandmoney.blogspot.com/2009/11/peak-oil-realities-myth-and-risk.html

Oil and Nat Gas, two diverging commodities

Energy, Oil Market, On the cover

oil vs gas

(Published in Spanish in Cotizalia on Thursday 15th Oct)

Oil has reached $80 a barrel. On the demand side, there has been an upward revision of estimates of the International Energy Agency, IEA and EIA. On the supply side, the fact is that in the last five years, increased investment in exploration and production ($220 billion per year), has not helped to replace 100% of the reserves consumed. Moreover, extraction costs are still too high and declines are affecting production in countries like Norway and Mexico, with falls of 6% and 3% respectively.

In natural gas, the situation is almost the reverse. The world has 60 years of life of proved reserves, which compares with fewer than 45 in oil, and to the estimate we must add large unconventional gas reserves. Proof of such excess is that in early 2009, British Gas decided to sell long-term 85% of its gas production expecting an environment of overcapacity in the medium term. Back then gas was trading at $ 7 per million BTU. Today is at $ 4.

On the demand side Eurogas expects zero growth in demand for gas in 2010, after a fall of 7% in 2009. This occurs while Qatar, Yemen and Australia, among others, are setting up more than 90 million additional tons per year of LNG capacity between 2009 and 2012. The projects in Qatar are competitive at $ 1.5 per million BTU, a level “only” three times less than the current one. This means nearly 9 trillion cubic feet per day of spare capacity. Um, does not look good.

As from 2013, the overcapacity created by excessive liquefied natural gas is reduced by lack of new projects. Since, according to international agencies, we will probably see a very moderate increase in demand in coming years, the supply of gas will remain ample. As for China, it can cover the vast majority of its gas demand with its own production, with the ability to have five times the current domestic production through its 756 trillion cubic feet of recoverable reserves.

Interestingly, gas E&P stocks have performed in line with their of oil peers, although the oil price has risen by 30% and gas has fallen by 4%, showing the market is already anticipating a return of oil-gas convergence. I do not know on what basis. I just came from a few days with gas producing companies and the expected returns on their investments remain significant. Is that what investors buy? We’ll see if the results prove it and if valuations are justified.