When things could not get any worse in the world’s energy crisis, Putin has successfully pushed the crisis to a whole new level. As I have talked about in the past few weeks, the hypocrisy of the people forcing bad renewable energy policies was devastating to the economy and consumers. Political leaders claim to have the environment and the United States citizen’s best interests at heart, well that is not true.
Let’s take the New England hypocrisy first. They import over 600,000 bpd from Russia and knowingly pay a country that is not following any ESG practices, let alone human rights issues. They also import enough LNG from Russia from the polar ice cap drilling areas to provide electricity at extremely high prices. It would be cheaper to buy from Penselyvania rather than Russia. Take a look at California in the graphic below. In 2020 they imported 20% of their oil from Iran, even when sanctions were in place. What do these two topics have in common? The answer is how long will the east coast hold out from buying Russian oil? Even if sanctions are placed on Russian oil, it will be purchased by other countries.
So when the number 3 exporter in the world’s oil suddenly becomes toxic and no country wants to buy, even at a discount, the overall market oil price will go up. As noted above, countries will buy oil even if sanctions are in place. With JP Morgan posting today that $180 oil by the end of the year is within reach does not seem out of line. We could easily see that considering the posture of the supply portion of the equation.
On Friday afternoon the WTI price is clocking in at $115. All of the calculations that our King Operating Research team is coming up with is a solid $100 to $120 for the remainder of the year. There will be some volatility based upon current events, but the supply and demand appear to support those numbers through the balance of 2022. Demand destruction occurs at $180 and it does not support a long-term position as sanctions do not work, and production limitations are calculated into the pricing.
While Russia got China’s backing early on, it remains to be seen if they will support Putin unequivocally. If China pulls its support for Russia, it could spell higher global oil prices, and even more geopolitical issues rolling forward. The graphic below shows the three biggest trade partners with Russia. The pattern reflects the long-term increasing relationship through 2020.
The Bottom Line
Everything is still in the air and nothing can get a hard and fast number to predictions. There are only a few data points that are showing 100% of being problems. Inflation, higher energy prices, and even more geopolitical confrontations. Countries will go to war over energy or the lack of it.
Oil and gas prices are going up. To how high remains to be seen.
Everything is still on the table. When wolves are backed into the corner, they will fight. If Putin gets any worse off, his back will definitely be against the all. Except this wolf has nukes.
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Jay R. Young, CEO, King Operating
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