Tag: Oil and Gas

Oil prices near $100 per barrel raise questions over demand destruction

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boonchai wedmakawand | Moment | Getty Images

Supply cuts from heavyweight crude producers have helped drive oil prices near $100 per barrel — fueling some to consider the potential for future demand destruction.

Brent crude futures rose 63 cents per barrel from the Thursday settlement to $96.01 per barrel on Friday at 11 a.m. London time and sit well above prices observed in the first half of the year.

The gains could prove short lived, some analysts warn. Sushant Gupta, research director of Asia refining at Wood Mackenzie, on Monday said “there are all signs that we could potentially see $100 per barrel in quarter four,” but warned that global economic fragility and incoming seasonal demand drops in the first quarter would make this unsustainable long term. In a Friday report, ING analysts signaled the oil market is “clearly in overbought territory.”

At the heart of price support are a series of voluntary cuts that fall outside of the official policy of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+. First is a 1.66 million-barrel-per-day decline implemented by some OPEC+ members until the end of 2024. Topping this, Saudi Arabia and Russia pledged to respectively remove another 1 million barrel per day of production and 300,000 barrels per day of exports until the end of this year.

This adds to a picture of improving Chinese demand — which analysts say could soon peak — and inventory drops. 

Some say buyers can weather the storm of high prices. Seven European refiners and traders, who spoke under anonymity because of contractual obligations, told CNBC that local buyers can withstand oil prices veering into triple digits without lowering their output runs. All of the sources pointed to firm refining margins, meaning the difference between the value of refined products and the price of the crude feedstock to generate them is favorable.

Uncertainty lingers over further China fuel export quotas, while Russia’s indefinite ban of its fuel exports — which Europe cannot purchase because of sanctions that followed Moscow’s full-scale invasion of Ukraine — has tightened availabilities of refined products and could particularly worsen global diesel shortages. Sanctions-disrupted access to Russian crude and OPEC+ cuts have shrunk availabilities of high-density and high-sulfur crude to Western buyers, encumbering their task to produce certain refined products.

Refinery margins so far have nevertheless been attractive enough that some refiners have lightened their seasonal maintenance to take advantage, one refiner said. Refined oil product demand could yet stay strong in the West, as Thanksgiving and winter vacations boost travel in the U.S. and Europe, and the hurricane season looms — which can historically disrupt both local refining and crude production. 

“We estimate a high-impact hurricane event this year could result in a temporary loss of monthly offshore crude oil production of about 1.5 million barrels per day (b/d) and a nearly equivalent temporary loss of refining capacity,” the U.S. Energy Information Administration said in July.

“Outages on that scale could increase monthly average U.S. retail gasoline prices by between 25 cents per gallon and 30 cents per gallon.”

‘Self-fulfilling prophecy’

Some European market participants polled by CNBC doubted triple-digit oil prices are sustainable in the long term, with three pointing to possible demand destruction — where customers gradually answer persistently high prices with fewer purchases. A fourth said demand destruction is a potential question, once prices hit $110 per barrel.

“Sometimes high oil prices can become a self-fulfilling prophecy,” Indian Energy Minister Hardeep Singh Puri warned in August. “The self-fulfilling prophecy means that at a particular point of time comes a tipping, and then there’s a fall of demand.”

One of the market sources also noted that steep backwardation — where current prices exceed future ones and a key metric to assess the viability of storage — discourages stocking refined products, leaving the market vulnerable to any disruptions.

“OPEC+ production cuts, including the voluntary extra cut by Saudi Arabia, are bearing fruit, lowering oil inventories and supporting prices,” UBS Strategist Giovanni Staunovo said in a Thursday note, pegging the bank’s oil price estimate at $90-100 per barrel over the coming months.

The oil price hike has benefitted Moscow despite sanctions. Under a program by the G7 largest global economies, non-G7 buyers may only use Western shipping and insurance to import Russian crude purchased at or below $60 per barrel.

But Moscow has been deploying its own dark fleet, and traders say Russia’s flagship Urals crude currently sells at roughly $8-10-per-barrel discounts to benchmark oil prices, implying values $25 per barrel above the G7 price cap. The Russian energy ministry did not respond to a CNBC request for comment.

OPEC+ move

An OPEC+ technical committee meets on Oct. 4 to review market fundamentals and individual production compliance. While incapable of adjusting OPEC+ policy, the Joint Ministerial Monitoring Committee can call an emergency ministerial meeting to do so. Three OPEC+ delegates, speaking anonymously because of the sensitivity of the discussions, told CNBC it is unlikely this upcoming JMMC meeting will result in policy tweaks.

The White House has previously vocally entreated OPEC+ producers to hike output, ease prices at the pump and alleviate inflation — but Washington has been largely silent in response to the production declines. In October last year, the U.S. levied accusations of coercion over other OPEC+ members against de-facto group leader Saudi Arabia, which depends on oil revenues for its economic diversification giga-projects.

The White House faces a difficult balancing act, as it pushes for a normalization of ties between Israel and Saudi Arabia, two top allies in the Middle East. Riyadh has also shown signs of steering closer toward China and Russia after rekindling relations with Iran through Beijing-mediated talks and receiving an invitation to join the emerging economies’ BRICS alliance. A spate of high-profile U.S. official visits to Saudi Arabia over the summer suggests ongoing discussions — though it remains to be seen if oil re-enters the diplomatic agenda.

It's not clear where the White House goes next to alleviate oil prices, says RBC's Helima Croft

RBC Head of Global Commodity Strategy Helima Croft, who says “we clearly see momentum” for Brent at $100 per barrel, stressed the absence of many options left in the U.S. toolkit.

“Will there be an energy component of a potential U.S.-Saudi deal? I think the Saudi administration would clearly like more Saudi barrels on the market, because, look, there are not a lot of great options for this administration to get prices down,” she said on Wednesday.

“They’ve already done the big [Strategic Petroleum Reserve] release, the question is are they really going do more … they’ve done deals with Iran, but those barrels are already in the market, so it’s not clear where the administration goes next for additional barrels.”

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Jim Cramer’s top 10 things to watch in the stock market Thursday

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My top 10 things to watch Thursday, Sept. 14

1. U.S. equities edge up in premarket trading, with investors largely betting the Federal Reserve won’t raise interest rates further when the central bank convenes next week. The S&P 500 is up 0.33%, while the Nasdaq Composite is 0.24% higher. U.S. government bond yields tick up, with that of the 10-year Treasury hovering just below 4.3%.

2. Oil prices continue to climb higher, with West Texas Intermediate crude, the U.S. oil benchmark, climbing above $90 a barrel for the first time since last November. Club oil holdings Coterra Energy (CTRA) and Pioneer Natural Resources (PXD) are up 1.48% and 0.88%, respectively, in early trading. Here’s the Club’s take on oil’s 10-month highs.

3. U.S. wholesale inflation climbs more than expected in August, according to the Labor Department’s monthly producer price index. At the same time, U.S. retail sales come in higher than predicted for last month, the Commerce Department reports, though the gains are largely driven by higher gasoline prices.

4. The European Central Bank raises interest rates by a quarter percentage point, bringing its deposit rate to a record-high 4%. The increase is the ECB’s 10th-conesecutive rate hike.

5. British chip designer Arm Holdings, owned by SoftBank Group (SFTBF), sets its highly anticipated initial public offering at $51 a share, valuing the company at over $54 billion. At this price, there’s not a lot of room for error. The firm will start trading Thursday on the Nasdaq under the stock symbol ARM.

6. The European Union launches an “anti-subsidy” investigation into China’s electric-vehicle companies, with Beijing calling the move “blatant protectionism.” Will Europe go 27.5% tariffs on Chinese cars? This could be a real issue for China.

7. China’s central bank is cutting the reserve requirement ratio for all banks, except those that have implemented a 5% reserve ratio, by 25 basis points from Sept. 15, in the government’s latest effort to prop up its faltering economy.

8. Jim Farley, the CEO of Club holding Ford Motor (F), rejects allegations by United Auto Workers President Shawn Fain that the automaker is not taking bargaining seriously ahead of a Thursday night strike deadline. Here’s the Club’s take on how a union strike could impact Ford.

9. KeyBank raises its price target on Chip designer Cadence Design Systems (CDNS) to $290 a share, up from $270, while reiterating an overweight rating on the stock. The firm’s call comes after KeyBank analysts met with early users of the company’s new AI-enabled EDA design portfolio. Cadence is a partner of AI chipmaker and Club holding Nvidia (NVDA).

10. Wolfe Research upgrades ecommerce firm Etsy Inc. (ETSY) to outperform, from peer perform, with a $100-per-share price target. The firm cites “many paths” for Etsy shares to outperform over the next 12-18 months.

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Oil prices are at 10-month highs. Here’s what Cramer thinks it means for two energy stocks

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An oil pump jack in Great Plains, southeastern Wyoming.

Marli Miller | Universal Images Group | Getty Images

Oil prices are hovering around 10-month highs, as a stout summer rally extends into the fall and delivers additional gains for the Club’s energy stocks, Pioneer Natural Resources (PXD) and Coterra Energy (CTRA). And Jim Cramer believes it’s not too late to buy either of them.

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An escalating dispute at major gas facilities in Australia could drive up European prices, analysts say

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Liquefied natural gas (LNG) storage units at Grain LNG importation terminal, operated by National Grid Plc, on the Isle of Grain on August 22, 2022 in Rochester, England.

Dan Kitwood | Getty Images News | Getty Images

The looming threat of strikes at Australian natural gas facilities will keep global gas markets on tenterhooks, energy analysts told CNBC, with traders fearing that a prolonged halt to production could squeeze global supplies and send European prices higher.

U.S. energy giant Chevron and unions representing workers at the Gorgon and Wheatstone projects in Western Australia are in daily talks this week to try to come to an agreement over pay and job security. The Fair Work Commission, Australia’s independent workplace relations tribunal, is mediating talks between both sides.

If a deal cannot be agreed, the strikes are scheduled to begin from 6 a.m. local time Thursday. The long-running dispute escalated even further on Tuesday as a union alliance announced plans to strike for two weeks from Sept. 14.

“In response to Chevron’s [duplicitous] claim that our EBA negotiations are ‘intractable’, the Offshore Alliance is escalating Protected Industrial Action to [demonstrate] that our bargaining negotiations are far from ‘intractable,'” the Offshore Alliance said in a Facebook post.

“Offshore Alliance members are yet to exercise their lawful workplace rights to take Protected Industrial Action and our bargaining claims will look more and more reasonable as Chevron’s Gorgon and Wheatstone LNG exports dry up.”

In response, a Chevron Australia spokesperson told CNBC, “We’re looking to narrow points of difference with Gorgon and Wheatstone downstream employees and their representatives through further bargaining mediated by the Fair Work Commission.”

There is so little flexibility in the market that the slightest provocation will cause large changes to the prices.

Jacob Mandel

Senior research associate for global energy markets at Aurora Energy Research

Fears of strike in Australia, one of the world’s biggest exporters of liquified natural gas (LNG), have recently pushed up European gas prices — and analysts expect near-term volatility to persist.

Jacob Mandel, senior research associate for global energy markets at U.K.-based consultancy Aurora Energy Research, said the global natural gas market was currently “very tight” and “very little supply flexibility” means that strike action in Australia could send European gas prices higher.

“Prices have moved quite significantly on basically little bits of news on what’s happened to these two facilities because there is so little flexibility in the market that the slightest provocation will cause large changes to the prices,” Mandel told CNBC via videoconference.

He said that European gas prices could climb to above 40 euros ($42.9) per megawatt hour if the strikes go ahead as planned. The front-month gas price at the Dutch Title Transfer Facility (TTF) hub, a European benchmark for natural gas trading, traded at 33.5 euros on Tuesday.

The TTF contract rose sharply to around 43 euros last month. TTF prices have since pared gains, however, and remain well below last summer’s extraordinary spike to more than 300 euros.

“I think it is extremely unlikely prices will go anywhere near where they were last September, where they hit these massive record peaks,” Mandel said. “Prices reached those peaks under extraordinary circumstances, which in theory could have been replicated. However, in Europe, we’ve taken many steps that could keep prices from reaching such a high.”

“It doesn’t mean that prices could increase above this 40 per megawatt hour level and if something else happens — a sudden winter storm, or something like this — certainly this can push [prices] higher,” he added.

Kaushal Ramesh, head of gas and LNG analytics at research firm Rystad Energy, said looming industrial action at Chevron’s Gorgon and Wheatstone facilities suggested near-term volatility could continue until a resolution is reached.

“We still don’t think there will be a material impact on production,” Ramesh said, citing the resolution of other similar disputes. He noted that it may become difficult for Chevron to prolong the strikes if they do go ahead.

“Whatever monetary impact there may be to Chevron from giving in to the workers’ demands is likely a fraction of lost revenue if production were to be substantially impacted,” Ramesh told CNBC via email.

“Thus, these are political developments, and things can get irrational, but so far, Asian buyers have not been too concerned. This winter, Japan and Korea will have an additional 6 GW of nuclear power available compared to the previous year.”

Another ‘big question mark’ for Europe

Wild price swings in energy markets in recent weeks come as the euro zone continues to wean itself off Russian fossil fuel exports following the Kremlin’s full-scale invasion of Ukraine.

Last month, the EU hit its target of filling gas storage facilities to 90% of capacity roughly two-and-a-half months ahead of schedule, bolstering hopes the bloc has secured enough fuel supplies to keep homes warm during winter. Nonetheless, the region’s gas market remains sensitive.

“Europe’s gas markets remain nervous, as seen in the jump in prices in August at the threat of an LNG worker strike in faraway Australia,” said Henning Gloystein, a director for energy, climate, and natural resources at political consultancy Eurasia Group.

“Real disruptions” are possible this winter, Gloystein said, including Norwegian winter storm outages or a cut of the remaining Russia gas to Europe. He warned that a stoppage of pipeline transit via Ukraine or a suspension of Russian LNG shipments were two notable risks for Europe.

One “big question mark” adding a risk premium to costs in Europe, Mandel said, is the future for the transit of Russian gas through Ukrainian territory, which is scheduled to expire at the end of next year.

Naftogaz CEO: We should discuss Russian gas transit deal with EU

Oleksiy Chernyshov, the chief executive of Ukraine’s largest oil and gas company Naftogaz, told CNBC in mid-August that the Russian gas transit agreement “is actually quite a complex issue.”

“I just wanted to make very clear Ukraine is servicing this transit actually in favor of European Union countries that are consuming Russian gas,” Chernyshov said. “We clearly understand that some of the countries cannot immediately get rid and stop consumption because they need it for the preparation for the winter.”

A spokesperson for the European Commission, the EU’s executive arm, told CNBC that the gas transit agreement is “still a long way from now” and they cannot speculate on what the situation would like in 18 months’ time. “It is also not for us to speculate nor comment on the two parties’ interest for a renewal of such contract,” they added.

The spokesperson said under the EU’s REPowerEU plan, the bloc’s objective is to “completely phase out Russian fossil fuel imports as soon as possible.” They noted that Russian gas now represents less than 10% of the EU’s pipeline imports, compared to roughly 50% before the energy crisis spurred by Russia’s full-scale invasion of Ukraine.

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Oil giant led by COP28 boss to spend an ‘eyewatering’ $1 billion a month on fossil fuels this decade, Global Witness says

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Sultan Al Jaber, chief executive of the UAE’s Abu Dhabi National Oil Company (ADNOC) and president of this year’s COP28 climate summit gestures during an interview as part of the 7th Ministerial on Climate Action (MoCA) in Brussels on July 13, 2023.

Francois Walschaerts | Afp | Getty Images

UAE oil giant ADNOC — run by the president of the COP28 climate conference — is expected to spend more than $1 billion every month this decade on fossil fuels, according to new analysis by international NGO Global Witness.

This is nearly seven times higher than its commitment to decarbonization projects over the same timeframe, the research says.

ADNOC, which recently became the first among its peers to bring forward its net-zero ambition to 2045, disputes Global Witness’ analysis and says the assumptions made are inaccurate.

It comes ahead of the COP28 climate summit, with Dubai set to host the U.N.’s annual conference from Nov. 30 through to Dec. 12. Viewed as one of the most significant climate conferences since 2015’s landmark Paris Agreement, COP28 will see global leaders gather to discuss how to progress in the fight against the climate crisis.

The person overseeing the talks, Sultan al-Jaber, is chief executive of ADNOC (the Abu Dhabi National Oil Company) — one of the world’s largest oil and gas firms. His position as both COP28 president and ADNOC CEO caused dismay among civil society groups and U.S. and EU lawmakers, although several government ministers have since defended his appointment.

Global Witness’ analysis, provided exclusively to CNBC, found that ADNOC is planning to spend an average of $1.14 billion a month on oil and gas production alone between now and 2030 — the same year in which the U.N. says the world must cut emissions by 45% to avoid global catastrophe.

It means that ADNOC is forecast to spend nearly seven times more on fossil fuels through to 2030 than it does on “low-carbon solution” projects.

By 2050, the year in which the U.N. says the entire world economy must achieve net-zero emissions, ADNOC is projected to have invested $387 billion in oil and gas. The burning of fossil fuels is the chief driver of the climate emergency.

A spokesperson at ADNOC told CNBC via email: “The analysis of, and assumptions made, regarding ADNOC’s capital expenditure program beyond the company’s current five-year business plan (2023 to 2027) are speculative and therefore incorrect.”

The Abu Dhabi energy group announced in January this year that it would allocate $15 billion for investment in “low-carbon solutions” by 2030, including investments in clean power, carbon capture and storage and electrification projects.

High-rise tower buildings along the central Sheikh Zayed Road in Dubai on July 3, 2023.

Karim Sahib | Afp | Getty Images

Global Witness arrived at its projections by analyzing ADNOC’s forecasted oil and gas capital expenditure, exploratory capital expenditure and operational expenditure for the period from 2023 to 2050. The data was sourced from Rystad Energy’s UCube database.

Rystad’s data is not available to the public, but is widely used and referenced by major oil and gas companies and international bodies.

“Fossil fuels companies like to burnish their green credentials, yet they rarely say the quiet part out loud: that they continue to throw eyewatering amounts at the same old polluting oil and gas that is accelerating the climate crisis,” said Patrick Galey, senior investigator at Global Witness.

“How [al-Jaber] can expect to lecture other nations on the need to decarbonise and be taken seriously is anyone’s guess, while he continues to provide vastly more funding to oil and gas than to renewable alternatives,” he added.

“He is a fossil fuel boss, plain and simple, saying one thing while his company does the other,” Galey said.

Established 30 years ago, Global Witness is a campaign group that receives funding from donors that include The Foundation to Promote Open Society, which is backed by liberal financier and billionaire George Soros, the European Climate Foundation, and the Quadrature Climate Foundation.

Among six campaign promises published last year, Global Witness says it seeks to “stop the oil and gas industry escalating global warming by making us dependent on gas” and to “ensure that the current energy transition is fair and responsible, serving people and the planet.”

The United Nations Framework Convention on Climate Change did not immediately respond to a request for comment on the analysis conducted by Global Witness. The Conference of the Parties (COP) is the supreme decision-making body of the UNFCCC.

Main priority for COP28

Al-Jaber was the founding CEO of Abu Dhabi state-owned renewable energy firm Masdar, which works in more than 40 countries worldwide and has invested in or committed to invest in renewable energy projects with a total value of over $30 billion.

Speaking earlier this year, al-Jaber said the main priority for the COP28 summit will be to keep alive the fight to limit global heating to 1.5 degrees Celsius.

The Paris Agreement aims to limit the increase in the global average temperature to “well below” 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit global heating to 1.5 degrees Celsius. Beyond the critical temperature threshold of 1.5 degrees Celsius, it becomes more likely that small changes can trigger dramatic shifts in Earth’s entire life support system.

The International Energy Agency says no new oil, gas or coal development is compatible with the goal of curbing global heating to 1.5 degrees Celsius.

In response to a request for comment from CNBC, an ADNOC spokesperson said that energy demand is increasing as the world’s population is expanding. “All of the current energy transition scenarios, including by the IEA, show that some level of oil and gas will be needed into the future,” the spokesperson said.

“As such, it is important that, in addition to accelerating investments in renewables and lower carbon energy solutions, we consider the least carbon intensive sources of oil and gas and further reduce their intensity to enable a fair, equitable, orderly, and responsible energy transition. This is the approach ADNOC is taking,” they added.

The spokesperson said its 2022 upstream emissions data confirmed the energy group as one of the least carbon-intensive producers worldwide. The company will seek to further reduce its carbon intensity by 25% and target near zero methane emissions by 2030, they added.

“As we reduce our emissions, we are also ramping up investments in renewables and zero carbon energies like hydrogen for our customers,” the spokesperson said.

A separate report published in April last year by Global Witness and Oil Change International found that 20 of the world’s biggest oil and gas companies were projected to spend $932 billion by the end of the decade to develop new oil and gas fields.

At that time, Russian state company Gazprom was estimated to spend the most on fossil fuel development and exploration projects through to 2030 ($139 billion), followed by U.S. oil majors ExxonMobil ($84 billion) and Chevron ($67 billion).

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Jim Cramer’s top 10 things to watch in the stock market Monday

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My top 10 things to watch Monday, August 14

1. It’s a big week of retail earnings. Is Target (TGT) undervalued? Is Walmart (WMT) overvalued? Is Club name TJX Companies (TJX) going to start with its usual up two points and then cascade down two? That’s what you need to be ready for. TJX and Target report second-quarter results on Wednesday, while Walmart reports on Thursday.

2. Morgan Stanly on Monday names Club holding Nvidia (NVDA) a top pick, while predicting a beat and raise when the company reports second-quarter results on Aug. 23. But I really want to warn people that I don’t think it’s ready to be bought.

3. Mizuho on Monday raises its price target on Amgen (AMGN), a very low-risk pharmaceuticals company, to $223 a share from $214, while maintaining a neutral rating on the stock. Elsewhere, Jefferies raises its price target on Amgen to $310 a share, up from $275, and reiterates a buy rating.

4. U.S. Steel (X) rejects an unsolicited takeover bid from rival Cleveland-Cliffs (CLF) that would have valued the former at roughly $7 billion. Cliffs is willing to buy anything. But why would the Federal Trade Commission ever allow this? U.S. Steel said Sunday it’s reviewing its strategic options.

5. Citigroup on Monday downgrades Urban Outfitters (URBN) to neutral from buy ahead of the clothing retailer’s second-quarter earnings on Aug. 22, while raising its price target to $40 a share, up from $36. The firm expects URBN to deliver an earnings beat, but thinks market expectations are too high going into the print. I like this company and find this downgrade disturbing.

6. Following a red-hot initial public offering last month, Morgan Stanley on Monday initiates coverage on beauty-and-wellness company Oddity Tech (ODD) with the equivalent of a hold rating and $57-a-share price target. The bank cites “strong long-term revenue growth prospects” for Oddity, but thinks the positives are already priced into the stock’s valuation.

7. Bernstein on Monday downgrades hotel chain Marriott International (MAR) to market perform, or neutral, from outperform, arguing the stock’s short-term upside is limited by its increased valuation this year and a slowdown in the U.S. luxury space. But the firm increases its price target on Marriott to $218 a share, up from $204.

8. Mizuho on Monday raises its price target on restaurant-management-software firm Toast (TOST) to $30 a share, up from $27, while maintaining a buy rating on the stock, following its “very strong” second-quarter results. Baird, conversely, designated Toast a “bearish fresh pick” following its big run of late. The firm has a neutral rating on the stock, with a price target of $25 a share.

9. China’s Country Garden, the country’s largest private real-estate developer, suspends trading of its onshore bonds on Monday, in a sign it could soon move to restructure its debt. Shares are down roughly 17%, weighing heavily on Hong Kong’s Hang Seng Index. The news is the latest sign Beijing will likely need to step in to shore up China’s beleaguered real-estate sector.

10. Piper Sandler on Monday raises its price target on Club name Coterra Energy (CTRA) to overweight, or buy, from neutral, on expectations for “strong execution across the portfolio.” The bank increases its price target on the oil-and-gas firm to $35 a share, up from $30.

And remember to tune into the Club’s Monthly Meeting on Thursday at 12:00 p.m. ET.

(See here for a full list of the stocks at Jim Cramer’s Charitable Trust.)

As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade.

THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER.  NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB.  NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Oil prices are finally rallying. Here’s what it means for three key energy stocks

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Oil rig and pump of H&P Rig 488 in Stanton, Texas, on June 8, 2023.

Suzanne Cordeiro | AFP | Getty Images

A long-awaited rally in crude oil prices has helped the Club’s three oil-and-gas companies become some of our top-performing stocks over the past month. And with new signs the commodity could continue to rally this year, we’re sitting tight on our energy holdings.

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Jim Cramer’s top 10 things to watch in the stock market Monday

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My top 10 things to watch Monday, July 24

1. Chevron (CVX) on Sunday announced excellent preliminary second-quarter results, while extending the contract of CEO Mike Wirth. The United States’ second-largest oil firm in May announced an agreement to expand its shale operations by acquiring PDC Energy (PDCE) in a deal valued at $7.6 billion, including debt. Chevron is set to release its full second-quarter report on Friday.

2. Truist on Monday lowered its price target on Club oil name Pioneer Natural Resources (PXD) to $196 a share, from $220, while maintaining a hold rating on the stock. The firm said it expects free cash flow for most exploration-and-production firms like Pioneer to be down over 50% given lower commodity prices.

3. Piper Sandler on Monday downgraded Club name Estee Lauder (EL) to neutral, from a buy-equivalent rating. The firm also lowered its price target on the cosmetics firm to $195 a share, down from $265. This is the result of of the downfall of the Chinese consumer, which seems endless.

4. Deutsche Bank on Monday raised its price target on Club holding Apple (AAPL) to $210 a share, up from $180, citing upside to the tech giant’s iPhone, Mac and services revenues. Apple is set to report fiscal third-quarter results on Aug. 3.

5. UBS on Monday downgraded electric-vehicle maker Tesla (TSLA) to hold, from buy, noting “very limited” upside to the company’s share price going forward. Still, the firm raised its price target on Tesla to $270 a share, up from $220.

6. Mizuho on Monday raised its price target on Club holding Nvidia (NVDA) to $530 a share, up from $400, while maintaining a buy rating on the stock. The analysts cited accelerating demand for generative artificial intelligence.

7. KeyBanc on Monday, in a call I love, raised its price target on Airbnb (ABNB) to $160 a share, from $135, on the back of reaccelerating travel spending. The firm reiterated an overweight, or buy, rating on Airbnb stock.

8. Mizuho on Monday raised its price target on Intel (INTC) to $33 a share, from $30, arguing semiconductor group multiples have improved. The firm maintained a neutral rating on the stock.

9. Raymond James on Monday upgraded home-construction company DR Horton (DHI) to outperform, or buy, from market perform on the back its “outstanding” fiscal third-quarter results. The firm, which has a price target of $160 on DHI shares, noted an “impressive rebound” in homebuilding margins.

10. Wells Fargo on Monday downgraded its rating on Interpublic Group (IPG) to equal weight, or neutral, from overweight, ahead of a late-cycle downturn. The firm lowered its price target on IPG to $33 a share, from $43.

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Fervo Energy hits milestone in using oil drilling technology to tap geothermal energy

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Fervo Energy’s full-scale commercial pilot, Project Red, in northern Nevada.

Photo courtesy Fervo Energy

Geothermal startup Fervo Energy announced a key technical milestone on Tuesday, paving the way for geothermal energy to play a bigger role in the transition to clean energy.

Fervo drills deep wells and pumps water into them. The water grows hot from the heat of the earth, then Fervo pumps it back to the surface, where a turbine converts that heat to electricity.

Fervo successfully completed a 30-day test, considered an industry standard for geothermal, at its commercial pilot plant in northern Nevada, the company said in a statement. In the test, Fervo drilled down drilled down to 7,700 feet and then turned to drill another 3,250 feet horizontally, and internal temperatures reached roughly 375 degrees Fahrenheit.

The test at its pilot plant achieved conditions that would generate 3.5 megawatts of electricity production, the company said. A single megawatt is roughly enough electricity to meet the demand of 750 homes at once.

Fervo has just started construction on a 400-megawatt project that it expects to be online by 2028, which would power approximately 300,000 homes.

“Fervo’s successful commercial pilot takes next-generation geothermal technology from the realm of models into the real world and starts us on a path to unlock geothermal’s full potential,” Jesse Jenkins, macro-scale energy systems engineer and professor at Princeton, said in a written statement.

Currently, most geothermal energy resources are located near tectonic plate boundaries where magma gets close to the earth’s surface, heating up water trapped in the earth’s surface nearby. In the United States, geothermal energy supplies only 0.4% of electricity right now.

Instead of relying on naturally occurring conditions, Fervo is using drilling technology developed by the oil and gas industry with hydraulic fracturing to create reservoirs in rocks deep underground.

“By applying drilling technology from the oil and gas industry, we have proven that we can produce 24/7 carbon-free energy resources in new geographies across the world,” Tim Latimer, the CEO of Fervo Energy, said in a written statement.   

Fervo Energy co-founders, Jack Norbeck (left) and Tim Latimer.

Photo courtesy Fervo Energy

Leveraging oil and gas drilling technology

A decade ago, Latimer was working in the oil and gas industry as a drilling engineer.

“I loved the work, but I was passionate about climate change. I saw all the tech advancement around me and realized that it could be used for geothermal energy,” Latimer said in a thread he posted on Twitter on Tuesday. Developments in oil and gas drilling, like the development of the polycrystalline diamond cutter, “changed the game,” Latimer said.

“With dramatically lower drilling costs, it would now be possible to drill down to depth and then drill horizontally for enhanced geothermal, significantly increasing the productivity of the resource, and enabling development anywhere,” Latimer wrote on Twitter.

When Latimer first had the idea to use developments in oil and gas drilling to tap into geothermal energy, he faced a lot resistance. The one place he found an interested ear was at Stanford’s geothermal program, where he went to grad school and in 2017 co-wrote and published a paper on the topic. That paper was the foundation for Fervo Energy, which Latimer launched in 2017 with Jack Norbeck, also from Stanford’s geothermal program.

“The last six years have been quite a journey. I never expected how much skepticism and pushback we would receive for what we thought was an obvious idea,” Latimer said in his Twitter thread. “So we set out to systematically prove this was a truly revolutionary, and viable, way of doing geothermal.”

They did find believers, though, and have since raised over $200 million in investment, Latimer said on Twitter.

Fervo’s partnership with Google and looking to the future

Google has been a leader in its commitment to operate on 24-7 carbon-free energy by 2030. “Solving climate change is humanity’s next big moonshot,” Google GEO Sundar Pichai has said.

To deliver on its goal to operate on 24-7 carbon-free energy by 2030, Google has had to buy a lot of renewable energy to support all of its energy-hungry computing processes.

In 2021, Google singed a partnership with Fervo to develop a geothermal power project.

Unlike wind and solar energy, which are intermittent, geothermal energy is an “‘always-on’ carbon-free resource that can reduce our hourly reliance on fossil fuels,” Michael Terrell, Google’s senior director for energy and climate, wrote in 2021 when the partnership was first announced.

“Achieving our goal of operating on 24/7 carbon-free energy will require new sources of firm, clean power to complement variable renewables like wind and solar,” said Terrell in a statement published Tuesday. “We partnered with Fervo in 2021 because we see significant potential for their geothermal technology to unlock a critical source of 24/7 carbon-free energy at scale.”

Fervo Energy’s full-scale commercial pilot, Project Red, in northern Nevada.

Photo courtesy Fervo Energy

As part of the partnership, Google is developing the artificial intelligence and machine learning systems to improve Fervo’s efficiency, and Fervo is adding clean energy to the grid in Nevada, where Google is a large clean energy customer.

The U.S. Department of Energy has also launched what it calls the “Enhanced Geothermal Shot,” which is an effort to reduce the cost of enhanced geothermal energy by 90% to to $45 per megawatt hour by 2035. The Department of Energy says it hopes enhanced geothermal systems can potentially provide clean energy to 65 million American homes.

Fervo still has a long road ahead from building a pilot plant to commercializing geothermal energy at scale, but Wilson Ricks, who works in Jenkins’ lab at Princeton and cowrote a paper on the role of geothermal energy in future decarbonized energy systems, says Fervo’s technical milestone is a real milestone.

“This is a very significant milestone in enhanced geothermal systems development. It is the first application of the advanced drilling and well stimulation techniques developed in the shale oil and gas boom to geothermal, and has demonstrated that these can be used to create artificial geothermal reservoirs delivering high flow rates,” Ricks told CNBC. “There is still more development to be done on the path to large-scale and cost-competitive commercial systems, but the significance of this achievement shouldn’t be understated.”

The kind of enhanced geothermal energy systems, like those that Fervo is developing, “could do double-duty as a form of long-duration energy storage, enhancing their ability to complement wind and solar in a decarbonized grid,” Ricks told CNBC.

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With oil production in freefall, Alaska, America’s worst state for business, chases a new carbon boom

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An oil pipeline stretches across the landscape outside Prudhoe Bay in North Slope Borough, Alaska, May 25, 2019.

The Washington Post | The Washington Post | Getty Images

Alaska can be a rugged and unforgiving place, and that’s not just its landscape. Its economy is prone to big booms and wrenching busts. Lately, it has seen more busts.

More than any other state, Alaska is dependent on oil. As much as 85% of the state’s unrestricted general fund revenue comes from oil production, according to state estimates. In some years, it has been well over 90%. But oil production has been in long-term decline in the state, which was once America’s No. 1 producer of crude but has been surpassed by several shale oil boom states, including Texas, New Mexico and North Dakota. Alaska’s crude production in 2022 was roughly equal to that of Oklahoma, and it hit the lowest level since 1976, according to Energy Department data.

This trend helps explain why Alaska‘s economy performed worse than any other state last year, according to the Commerce Department, shrinking by 2.4%. And it explains why the Last Frontier finished dead last in CNBC’s 2023 America’s Top States for Business rankings.

In addition to a last-place finish in the Economy category, Alaska ranks 49th in the Infrastructure, Education, and Access to Capital categories. It finished 48th in Cost of Doing Business. This is the seventh time since 2007 that Alaska has finished at the bottom, and the third time in the last five studies.

Alaska’s carbon turnaround plan for the future

Alaska isn’t giving up on crude. Recent approvals such as the controversial Willow Project have led state officials to forecast an increase in production in the years ahead. But Gov. Mike Dunleavy and the state legislature have a plan that they hope will reverse Alaska’s fortunes once and for all, by making the state less susceptible to gyrations in the oil market.

“Alaska was built on a promise that we would be north of the future. That we would be visionary,” Dunleavy, a Republican, said at a news conference May 23.

Dunleavy was marking the signing of SB 48, legislation that officially puts the state in the carbon business.

“Just like oil, just like gas, just like our timber, this is a commodity that can be monetized now,” he said.

The Tongass National Forest on Prince of Wales Island, Alaska, July 2, 2021.

The Washington Post | The Washington Post | Getty Images

Under the new law, Alaska will be able to sell so-called “carbon offset credits,” capitalizing on the state’s vast public forest lands. Companies that emit carbon will be able to buy the credits, effectively paying the state to preserve and protect its forests, thereby canceling out, or offsetting, those emissions.

What the state doesn’t spend on maintaining its forests, it can keep as revenue.

Alaska Natural Resources Commissioner John Boyle, who is working on the rules to implement the program, said in an interview with CNBC that the market for the new credits could be huge as companies discover the limits of carbon reduction technology.

“Across America, and in the rest of the world, you see a number of companies that have set very aggressive net zero (emission) targets for themselves,” he said. “Ultimately, in order for a lot of these companies to be able to hit the targets that they’ve set for themselves, they’re going to need to look for other options for offsets.”

The emissions offset market is growing

Carbon offset programs are already gaining popularity around the world. The California Air Resources Board operates an extensive offset program that the state says is an essential part of its program to reduce greenhouse gas emissions.

When Dunleavy unveiled the legislation in January, he noted that Alaska’s Native Corporations have generated $370 million in revenue selling offset credits since 2019.

The state has not offered any estimates of how much revenue its program could generate, but Boyle said it could begin making money soon.

“I don’t think it’s unfair to say that the state fully anticipates seeing revenue within a relatively short period of time, likely within the next 12 to 18 months,” Boyle said. “We fully expect to see some new revenues coming in as companies acquire our leases and do other things to prepare themselves to develop carbon offset projects.”

More coverage of the 2023 America’s Top States for Business

Carbon credits are controversial

Alaska is all in on the plan. The bill passed the state Senate unanimously; only two members of the House voted against it.

But outside Alaska, there is no shortage of skepticism.

“Multiple lines of evidence suggest that Alaska’s forest carbon offsets program could produce carbon credits that don’t represent real climate benefits,” wrote Freya Chay and Grayson Badgley of the climate research group CarbonPlan in a commentary published in May. 

They note that while the program promises to protect Alaska’s forests and the climate benefits they provide, it also promises not to reduce timber harvests. The researchers said the credits appear to be structured to “simply reward a landowner for doing what they already planned on doing.”

“Although this could be a win for the State budget, it would be a loss for the climate — and for the credibility of the voluntary carbon market,” they wrote.

Boyle argues that the funding from the offset credits will allow the state to manage its forests more effectively and efficiently. That way, he said, the state will eventually have larger forests — with more trees to capture carbon, and more timber left over to harvest.

“That gives you a margin by which, if you choose, you can do some selective timber harvesting, as long as you maintain a level that is appropriate with the baseline that’s been established,” he said.

Carbon credits are just the beginning of Alaska’s plan to transform its economy. Dunleavy has also proposed creating a “carbon sequestration” program, where the state would capture its carbon emissions — or accept shipments of carbon captured elsewhere — and inject them into underground storage beneath Alaska’s huge expanses of open land.

“There’s a real ability here to move the needle in managing the world’s carbon and storing it for geologically significant periods of time,” Boyle said.

They believe that there is also an ability to diversify Alaska’s economy and make it competitive again, while helping the planet at the same time.

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