Thursday, September 23, 2021

Idle Rambling In Light Of A Very Interesting Week -- Not Ready For Prime Time -- Just Thinking Out Loud -- September 23, 2021

US energy, just thinking out loud. Not ready for prime time.

Nuclear: there will be no net addition of nuclear energy in my investing lifetime.

Coal: tea leaves suggest we won't see any additional coal-produced electricity in the US in my lifetime.

Energy demand will increase annually for the rest of my investing lifetime. EVs.

Hydroelectricity: niche and no additional hydroelectricity in my investing lifetime.

That leaves: natural gas and solar/wind.

Neither wind nor solar are dispatchable.

Presidential and US Congressional policies are widening the moat with regard to electricity production.

Switching gears.

COP really, really changed the landscape this past month. 


  • European majors are "giving up."  So, it's pretty much the US and OPEC+. 
  • for the US:
    • first tier: XOM, CVX, COP. 
    • second tier: EOG, Hess, MRO, OXY
    • third tier: CLR, PXD, DVN, WPX,
    • fourth tier: APA, Whiting, 

Meanwhile, Apple, Inc

Things are looking really, really good for Apple.

The "Epic" story has pretty much run its course, and Epic lost, Apple won.

iPhone 13 Pro phones: pre-orders suggest these phones are going to do a whole lot better than anyone expected. 

iPhone 13: from $699.

iPhone 13 Pro: from $999.

Most of these phones are subsidized by the provider.

Most folks will upgrade. 

Before the update and the subsidies:

  • $699 / 24 = $30 / month.
  • $999 / 24 = $41 / month.

 Folks who can afford an iPhone 13, will easily be able to afford the iPhone 13 Pro.

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here


As I go through all the business stories each day, any time I see something "outlandish," or completely unexpected, I have to remind myself that the plague year telescoped everything from 2020 - 2035 into 2020 - 2025.

Active Rigs In North Dakota -- September 23, 2021


September 24, 2021: a reader provides additional information that can be added to information below -- with these additions, one could argue that the number of active rigs in North Dakota might trend toward 40 in early 2022; drillers drill throughout the year in North Dakota, but due to severe winters, some of this could be delayed to 2Q22. Fracking really slows down in 1Q22 due to weather. 

  • Crescent Point has B21 running now. 
  • Oasis has picked up B26 from Liberty. 
  • Hess: rumors that it will be picking up X25 in beginning of 22; 
  • Greyson Mill will start a drilling program in 22 (rumor from reader, "I have heard...". 
  • Whiting to add 1
  • Ovintiv possibly add 1, 
  • Iron Oil and Gas add 1,
  • Koda Resources to add 1 rig for a 4-hole pad
  • Continental to add 1 more
  • Sinclair to add 1 rig for a single well. 
  • Reader "wouldn’t be surprised if the operators that add continue extending contract term length as oil prices stay above $65." 

I "predicted" CLR, Whiting might add a rig; that CPEUSC would have a rig (apparently they do). I forget about Koda Resources and Iron Oil and Gas. I actually thought about Iron Oil and Gas last night -- this is nice to see.

Original Post

The NDIC no longer provides "active rig" data in the Bakken. 

Based on NDIC reports when that data was last provided and new data from readers this is what I see. These are active oil and gas rigs. In addition, there may be two rigs drilling salt water disposal wells:

  • CLR: 9
  • Hess: 4
  • MRO: 2
  • Slawson: 1
  • Oasis: 1
  • Rimrock: 1
  • Petro-Hunt: 1
  • Kraken: 1
  • Ovintiv: 1
  • Whiting: 1
  • PetroShale: 1
  • Bruin: 1
  • Hunt: 1
  • BR; perhaps their first active rig next month (October) and a total of two rigs in 1Q22
  • WPX: 1, 1Q22
  • Sinclair: 1 "soon"

That works out to twenty-nine (29) active rigs going into 1Q22. 

Missing in the list above and operators I would expect to add a rig:

  • Zavanna
  • Crescent Point Energy
  • True Oil
  • Whiting: from one to two, maybe three
  • WPX: from one to two

I don't think they need to, but I wouldn't be surprised if CLR actually added another rig.

Summary Of Evidence -- Ivermectin -- Covid-19 -- September 23, 2021




Front Line Covid-19 Critical Care Alliance, September 21, 2021.  

Link here

I track the ivermectin experience here.

I still maintain that an uncontrolled, un-blind study would be perfect here in the United States:

  • Florida: allow physicians to prescribe ivermectin if patients request it, for any condition;
  • California: ban ivermectin as an adjunct in prevention of / treatment of Covid-19. 

I could be wrong, but I think "we" have more data regarding ivermectin than any Covid-19 vaccine.

End Of Day -- September 23, 2021

In a long note like this, there were be typographical and content errors. If any of this is important to you, go to the source. Facts and opinions are interspersed; it may be difficult to separate fact from opinions (or personal comments). 

This is not an investment site. Non-Bakken information is posted to help me put the Bakken in perspective when I come back to look at this post twenty-three years from now. 

For the archives, at the close, an incredible day on the market:

  • Dow: up 507 points
  • S&P 500: up 53 points
  • NASDAQ: up 155 points
  • WTI: $73.30 and all signs point to more upside
  • DXY: 93.095; down slightly
  • TYT: 1.435%

Ten year Treasury: the jump in the ten year Treasury today -- to over 1.4% -- is related more to what the central bank in the UK did today rather than what is going on in the US. -- CNBC panelists. From Reuters:

U.S. Treasury yields jumped on Thursday after the Federal Reserve opened the door to raising interest rates as early as next year, a potential move that was reinforced by the Bank of England's outlook on rates and a rate hike by the Norwegian central bank.

UK: if that which is now occurring in Great Britain was happening in the US, the market would have plummeted today, and folks would have been talking about a recession, not just a recession in the US, but a global recession. Here are the headlines in the UK today:

  • energy prices are surging in Great Britain;
  • there is great concern that the country will run out of natural gas this winter, critical for heating;
  • the UK announced that gasoline is now being rationed;
  • gasoline is being rationed because there is a shortage of truck drivers.

The  big question: why is there a shortage of truck drivers all of a sudden. The UK is not a particularly big country (or group of countries). "Shortage of truck drivers" almost has the feeling of a meme. Need to see what Reuters or ArgusMedia says about this. If it is a shortage of truck drivers, the Brits will do just fine.

So, now, let's get the links:

  • large Dutch zinc factory cuts output as Europe's energy crisis widens. Link here.
  • BP now shutting some UK gasoline stations due to lack of fuel. Link here.
  • Not just BP, but also XOM sees fuel retail sites affected by trucker shortage. Link here.
  • Vitol CEO sees gas-led crunch adding 500,000 bopd to oil demand. Link here.
  • Vitol sees Brent jumping to $80+ as energy crunch lifts demand. Link here.
  • Citi not ruling out $100-natural gas. Link here.

Peak oil?

  • shouldn't OPEC+ be ramping up supply fast, if they can. No inventory excuse any more. Link here.

Wheat: the EU has turned to Australia for durum wheat supply in the 2021 - 2022 marketing year amid supply tightness in Canada -- the world's largest producer of that crop. Link here 

US LNG: FERC authorizes / okays feedgas flows to Sabine Pass train 6. Link here

US distillate storage: at the lowest level in the last five years for this time of the year just as talks of gas-to-oil switching demand takes place outside of the US. Link here.

US stagflation: it's coming. And it will be max pain. Link here. For the archives.

US energy crisis: it's coming due to "all-or-nothing environmental climate change policy." Link here.

US electricity gird 101: the US electric power system in the lower 48. Three poorly coordinated, integrated sectors. East, west, and Texas. Link here.

On a lighter note, the US Fed is introducing another animal from the monetary menagerie to join the hawks, doves, bulls, and bears. The market is now, apparently, ready for a fast-moving tapir. Link here.

COP in the Permian: COP looking to sell some of its conventional oil and gas properties in the Permian Basin. Link here.

  • asset size: about $500 million
  • considered less valuable acreage than its unconventional acreage in the Permian
  • lower-value oil and gas producing properties in the Central Basin Platform and the Northern Shelf formation
  • combined production of 13K boepd
  • $500 million / 13K boepd = $40,000 / boepd

COP: steps up pressure to collect payment from Venezuela. Link to ArgusMedia.  

Nike (from CNBC, Fast Money):

  • missed expectations;
    • revenue of $12.25 billion missed expectations of $12.50 billion even though revenues were significantly higher than last year
  • demand not the problem; rather the temporary supply chain issues
  • supply chain issues;
    • sources 45% of its total global supply out of Vietnam
    • Vietnam had country-wide shutdown
    • shipments around the world held up at the ports
  • global sports (Olympics, etc, did well)
  • better numbers in China; numbers not quite as good in the US
  • margins doing well
  • panelists:
    • not a bit worried about Nike; when 45% of their supply is shut down in Vietnam....
    • stay clear near term --- Under Armour doesn't have the same headwinds 
    • thinks Nike tomorrow could be higher than close today; has already recovered some of the sell-off after hours.
  • bottom line: sounds like a scary headline; probably won't amount to much.

Back to the Bakken

NDIC is no longer updating scout tickets, active rigs, the "map." I'm not sure if production data is being updated. This has been going on since mid-July, 2021.

Active rigs, see note above. This is my best guess:

Active Rigs2611596657

Two new permits. #38579 - #38580, inclusive:

  • Operator: Rimrock Oil & Gas
  • Field: Heart Butte (Dunn County)
  • Comments:
    • Rimrock has permits for two Two Shields Butte wells, to be sited in NESE 8-149-92; sited 1925 FSL and 497 FEL; and 1912 FSL and 525 FEL.

Six permits renewed:

  • Hess: six SC-JW Hamilton permits in Williams County; SENE 13-153-99;

These were the Hess SC-JW Hamilton permits announced in 2018, link here:

  • 34998, conf, Hess, SC-JW Hamilton ...
  • 34997, conf, Hess, SC-JW Hamilton ...
  • 34996, conf, Hess, SC-JW Hamilton ...
  • 34995, conf, Hess, SC-JW Hamilton ... 
  • 34994, conf, Hess, SC-JW Hamilton ...
  • 34993, conf, Hess, SC-JW Hamilton ...
  • 34543, conf, Hess, SC-JW Hamilton ...
  • 34542, conf, Hess, SC-JW Hamilton ...
  • 34541, conf, Hess, SC-JW Hamilton ...
  • 34539, conf, Hess, SC-JW Hamilton ...
  • 34538, conf, Hess, SC-JW Hamilton ...

The MRO Stillwell Is Off Confidential; Huge Well; 400K Bbls Crude Oil In Less Than One Year -- September 23, 2021

Previously noted as a potentially monster well while still confidential, this well is not off the confidential list:

  • 32434, drl/>F/A-->4,679, MRO, Stillwell 21-13H, Lost Bridge, t9/20; cum 384K 7/21;

Production to date:

PoolDateDaysBBLS OilRunsBBLS WaterMCF ProdMCF SoldVent/Flare

Other wells on the pad:

  • 38025, loc/drl, MRO, Osking USA 14-12H, Lost Bridge,
  • 21839, conf, MRO, Kottke USA 11-13H, Lost Bridge,
  • 21837, 1,398, MRO, Deep Creek USA 14-12TFH, Lost Bridge, t3/13; cum 347K 7/21;
  • 21838, conf, MRO, Levi USA 11-13TFH, Lost Bridge,
  • 32434, above;
  • 21840, 1,380, MRO, Deep Creek 21-13TFH, Lost Bridge, t2/13; cum 375K 7/21;

Notes From All Over -- Part 2 -- September 23, 2021

TGT: Target announces it will not hire additional seasonal workers for the holidays. If this is accurate, as reported, this is huge. Let's count the ways:

  • first and foremost, the CFO has run the numbers and determined the additional cost just not worth it
    • shortage of retail workers --> higher hourly wages for those seasonal workers
    • training dollars
  • Target may have surveyed their workers and discovered current workers would like the extra pay for themselves that might include overtime benefits
  • apparently we're only talking about twenty extra hours per employee over the entire season (but that was not made clear)
  • current workers much more efficient than seasonal workers, and perhaps much more loyal staff
  • staff shoplifting probably less among loyal employees
  • this was not an overnight decision; Target has probably been working overtime (no pun intended) to improve efficiency this past year;
  • Target may put more emphasis on e-commerce
  • twenty-four percent of the twenty-four hours in a day (i.e., about six hours/day) probably accounts for eighty percent of revenue; if Target can spread that out over more hours, sales per employee will go up;
  • other comments:
    • we'll probably hear some griping (and reporting on that griping) on CNBC during the holidays, but if Target can maintain sales numbers with fewer seasonal employees, shareholders will love it


  • Sophia, a second grader, is absolutely thrilled with being back at school
  • elementary students bring home stories about everything that is being discussed at schools. Sophia has not once mentioned (and I never ask):
    • anything about Covid at school;
    • anything about masking (they wear masks at school); it's become the new norm;
    • about the teachers that are not in school because they were in contact with someone with Covid and are now quarantined at home;
    • about their friends not in school because they are home in quarantine (the school reports the cases each day, and the school is averaging about one student each day being identified for being Covid-positive0;

Market: I'm still looking for that 10% to 20% pullback in the market; now we have this news and/or observations from today:

  • maybe, probably, possibly, the Fed will barely start tapering by the very end of the year;
  • talking heads suggest Jay Powell was "hawkish" yesterday; yet there was no indication we would see a quarter percent increase in the fed rate before December, 2022 -- that's more than a year from now -- in my mind that's hardly hawkish.
  • tapering, even if it begins in December, 2021, it won't be complete until July, 2022;
  • tapering is not selling; tapering is simply buying less;
  • tapering is not a rate hike
  • infrastructure bill will move along; those US senators holding out are simply bargaining for better deals for their states;
  • jobs report today moves the Fed calendar to the right (it will be longer before tapering begins, rise in interest rates)
  • Delta surge appears to be coming to an end
  • the "China-contangion" never occurred
  • Dow jumps 500 points in one day (today)
  • Apple's P/E has dropped from 37 to 28
  • tea leaves suggest WTI will melt up in price
  • and, of course, my favorite graph (link pending)
  • so, there you have it

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here

DVN: I think DVN was up 7% two days in a row, but am not sure. I have already forgotten what DVN did yesterday. 

One breakout in two different sectors:

  • JPMorgan: when it breaks out, it breaks out ...
  • Apache: downtrend for the past ten years; if it breaks the trend today ... a monster breakout in the making; lousy finance statement; but great assets;

CNBC, best four hours:

  • 8:00 - 9:00 a.m. CT
  • 11:00 a.m. to noon CT
  • 4:00 p.m. to 6:00 p.m. CT

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here

Investopedia: top energy stock picks for October, 2020. Link here.

  • Best Value Energy:
    • MPC
    • APA
    • Antero Midstream
  • Fastest Growing:
    • COP
    • OKE
    • Valero Energy
  • Most momentum:
    • Cimarex
    • Devon
    • Targa Resources
    • Russell 1000
    • Energy Select Sector SPDR ETF

I got serious about Devon on August 7, 2021, during a vacation to Flathead Lake where I had several days to clear my mind. Link here

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here.

New all-time record: US household net worth set new record. Link here.

  • new all-time high: $141.7 trillion at end of June, 2021
    • boosted by stock market gains and a pandemic-induced real-estate boom
    • equity markets: added $3.5 trillion to household assets
    • S&P 500 in 2Q21: 8.5% return with reinvested dividends included
    • real estate: added $1.2 trillion
  • total: household net worth rose by $5.9 trillion
    • let's see $5.9 / $135.8 = 4.3%
  • household savings:
    • fell to $10.6 trillion from $10.8 trillion (yawn)
    • balances in checking accounts rose to $3.6 trillion from $3.3 trillion
    • net: -0.2 trillion +0.3 trillion = 0.1 trillion on the plus side
  • the plague year?
    • household wealth has rocketed b $31 trillion -- 28% -- since the first quarter of the plague year (2020) -- an unprecedented increase.
  • real estate paper wealth increased by $1.2 trillion -- lots of spinoffs from this, including increased revenue for state governments through property taxes;
  • big question: will "tax-the-rich" AOC be willing to repeal the Trump property tax deduction for high earners?

Good news on inflation: companies are running up against resistance to passing on higher prices to customers.

Notes From All Over -- Part 1 -- September 23, 2021

Will the Dow go up over 500 points today? Asking for a friend. (Yes, it did.)

Apple, Inc:

  • unable to keep up with iPhone 13 orders --- delivery times delayed. Supply or demand issue?
  • iPhone 13 preorders begin shipment; but iPhone Pro shipments estimates slip to late October
  • the tea leaves suggest Apple under-estimated demand for the "Pro" phone -- the most expensive ever;
  • new iPad Mini begins shipping; sixth generation iPad mini

GE: the market is going absolutely parabolic; GE up another $5 this morning; I mentioned the other day, I missed this one. Later: see first comment from a reader. I feel better. I'm always humbled by my readers.

TSLA: on a day the market goes parabolic, TSLA is down. Not much, but it's down.

September swoon: LOL. The month's not over but weren't we told that September was going to be a really, really bad month for investors? Not only is the Dow up 450 points but the Dow is back to green week-over-week. To think that folks freaked out when the market was down, what, maybe 2% earlier this week when the Dow was up ten, twenty, thirty percent depending how far back one wants to go.

Investing; I had planned to buy for the fourth day in a row but I will hold off until later today, looking for some profit taking. In the big scheme of things, I really don't care. Anything I buy these days will be passed on to the grandchildren. I will never see it. They won't care what I paid for shares; they will simply be interested in the number of shares they inherit. Yes, I know. 

Investing: a great week for selling losers, re-balancing one's portfolio. On CNBC they call it tax harvesting. In addition, CNBC talking heads talking a lot about investors looking for dividends. Interesting. 

WTI: I see WTI is now up 1 percent in early morning trading. 

US ports: chicken or the egg? We keep hearing about the number of cargo ships sitting off shore, a choke point at the ports. We never hear in those reports the amount of cargo throughput these days compared to 2019. Apparently, a lot of those containers are shipped less than full, for whatever reason. 

Jobless: weren't we told that initial claims would drop once the "supplemental" unemployment benefits were stopped? That's what I thought we heard. Those "supplemental" unemployment benefits have apparently stopped in many (most?) cases and yet, first time unemployment claims came in higher than expected. So, what's the problem: the analysts misjudging or folks not returning to work? I don't know. Unemployment at 5% and yet employers can't find enough workers? What's wrong with that? Supposedly five percent of those looking for work can't find a job. LOL. It appears more and more there's a mismatch between what workers want / qualified vs what employers want / require.

Reading Today

Sophia, second grade art. Sophia tells me they are learning about Mary Blair, a colorist / artist for Walt Disney who wanted to "move into" color whereas Disney did not want to leave black and white. The teacher's source does not put Walt Disney in a good light with regard to Mary Blair. 

I was curious. For several years I've had the "bible" regarding the Disney women on my top shelf. Surprise, surprise! Mary Blair is highly featured in the book, and based on the mini-bio, she and Walt Disney had a great relationship. Whatever.

By the way, on this $60.00 hardcover book is being offered for $45.

Tolkien: I'm back in my J.R.R. Tolkien phase. Not quite sure how that happened. I think I mentioned Beowulf and J.R.R. Tolkien the other day. Still reading that (again) but will spend only another day or two on it. I just started re-reading Tolkien and the Great War: The Threshold of Middle-earth, John Garth, c. 2003. 

It certainly puts Afghanistan in (the proper?) perspective. On so many levels.  

Good, bad, or indifferent, I was disappointed to see so few peace activists come out in support of Joe Biden on this one. It seems so many are quick to protest wars but then are not to be found when someone actually ends a war. Where was Cher? Where was Susan Sarandon? Where was Jane Fonda? Ironically, or interestingly, these folks were not even actively protesting for the end of this longest, forgotten war. 

No Wells Coming Off Confidential List -- September 23, 2021


Later, 9:03 p.m. CT: see comments. A reader writes --

I actually had heard that BR was picking up one rig next month. I do know that WPX is picking up a rig in January as well. I think Sinclair may be picking up a rig soon as well.

Later, 10:36 p.m. CT: a reader writes that BR will add two rigs in the Bakken in January, 2022.

Original Post

Firster things firster: just after jobless numbers came out this morning, Dow futures jumped from 230 points to 250 points UP at the opening. Predictable in light of Jay Powell's comments yesterday; see below. 

First things first: ISO NE

  • spike to $100 earlier this morning; that just blows me away; should be below $20; are people paying attention?
  • now down to $45 -- autumn: heating / air conditioning should not be a factor
  • natural gas + nuclear: 90%
  • none of the rest matters
  • significant portion of renewable energy is nondispatchable

The aha moment: EU / UK leaders are not concerned about high energy prices, despite the rhetoric. 

Resident Biden is certainly not concerned. It's all part of the plan to move renewable energy to the front burner (pun intended). "They" know they can get away with it. Any doubts? Follow the Covid-19 mandates this past year. Bureaucrats set policy, and the courts did not step in to prevent loss of individual freedoms. 

The numbers:

  • Dow: up 230 points, futures
  • DXY: 93.130; down 0.308;
  • WTI: $71.87
  • TYT: 1.341%; flat
  • dividend announcements today
    • Accenture raises dividend
    • no change: Darden Restaurants, Pfizer, Target
  • Jobless: first time jobless claims at 351,000, worse that expected
    • yesterday: Jay Powell clearly said that tapering would not begin until he sees a good jobs report
    • let's see if Steve Liesman reminds us of that today; my hunch: nope.

UPS: most interesting number to watch this next month -- the UPS earnings report -- not sure when they will report but possibly October 27, 2021 -- in light of the FedEx numbers this week. 

My hunch: UPS will do just fine; FedEx has its problems unrelated to Covid, though they will blame their problems on labor shortages due to Covid -- to some extent true -- but FedEx problems began long before Covid.

Investors: news coming out of China early this morning. Will today be a repeat of Monday -- when there was a 500-point sell-off on the Dow?

COP: this COP/Shell story has legs. Still making headlines. Over at SeekingAlpha today: COP: hungrily snapping up Shell's discarded acreage. Link here

  • Long rumored to be for sale, ConocoPhillips picked up Royal Dutch Shell's Permian land holdings.
  • Price tag was a solid one, given the quality and resource depth. Shell is just a somewhat forced seller, given its corporate direction.
  • Deal is highly accretive to ConocoPhillips shareholders, generating billions of additional free cash flow over the coming years. A good chunk of that is ending up in investor pockets.

COP: WAR52 suggests new name for COP -- ConConchShell. Link here with proposed logo. New ticker: CCS?

But my favorite all week: Apple and Epic. 

Gasoline demand: took a significant downward turn this past week. Link here

EU / UK energy crisis:

  • Nord Stream 2: Russia is gonna control .... link to The WSJ.
  • crude stocks drawing down bigly: drawing down in the US (thanks in part to GoM outages; in Europe, Japan, China. Floating crude is down sharply in the last two weeks, falling at a 2.5 million bopd rate; floating storage now at the lowest since early March, 2020. Link here
  • oil product inventories: at lowest level since reporting began in 2017; total oil stocks fall 8% week-on-week; but look at this:
    • fuel oil demand up from natural gas switching
    • significant draw in middle distillates


  • Vitol Group teams up with BYD. The former: largest independent oil trading house; the latter: Chinese EV maker backed by Warren Buffett. Link to Charles Kennedy. Reported by someone else, it's a non-story; written by Charles Kennedy, a big story.

Vaccines: The WSJ

Covid: it's official. FDA says I'm eligible for a booster shot. Six months after two-dose regimen. For me, that means December. Whoo-hoo. 

Need to fact-check: it's being reported that EOG is using natural gas to mine bit coin. Some suggest EOG realizing $10 - $12 / MCF. Link here.

Back to the Bakken

Rigs: a reader writes that BR will add two rigs in the Bakken in January, 2022.

Active rigs, no longer being reported by NDIC, best guess:

Active Rigs2611596657

No wells coming off confidential list, being reported by NDIC. We'll see later today.

RBN Energy: European carbon trade drivesup global gas prices, by design.

Global gas and LNG prices are currently at record high levels. If we sound like a broken record, it’s because this epic bull run that started in the spring, has been roaring in recent weeks and showing little sign of slowing down. European prices have hit new post-2008 or all-time highs more than 25 times since late June, and prices in Asia, which had been at seasonal all-time highs for most of the spring and summer, finally last week also topped its previous all-time record from last January. A confluence of bullish factors, including high global demand, low storage inventories, weather events, and supply outages, have all contributed to the surge in gas prices. While many of these are near-term drivers and will eventually flip in the other direction, there is one bullish driver of global gas demand — European carbon prices — that will remain a constant in the years to come. That is by design because the carbon market is meant to serve as an incentive for the industry to seek greener solutions over fossil fuels. In today’s RBN blog, we look at the European Union’s Emission Trading System (EU ETS) and how it interacts with the global gas market.

Europe has the world’s oldest and largest carbon trading system. We’ll start with its origins to get a better understanding of how it works. The market, which now covers all the countries in the EU as well as Iceland, Liechtenstein and Norway, was established in 2005 to regulate emissions from power generation, manufacturing and some airline operations. Together, the sectors that fall under the ETS regulations account for about 40% of the EU’s total greenhouse gas (GHG) emissions. The EU ETS is a cap-and-trade system, meaning that there is an annual limit or “cap” on the total allowable GHG emissions from each of the roughly 10,000 installations covered by the ETS regulations. Each of the installations (say, a power plant or factory) receives a certain number of emissions allowances for a year. If an installation emits its exact allowance, then it is all set, but if it has extra allowances or needs more, that’s where the “trade” portion of cap-and-trade comes in. If an installation has extra allowances, it can bank them for the following year or sell them using the ETS and, if it needs more allowances, it has to purchase them. The open trading of emissions allowances provides a financial incentive for participants to go green and does it in a least-cost-first way. Basically, those who can reduce emissions cheaply, do so and then sell credits, and those who can’t, buy them. Either way, the overall market is capped, guaranteeing that the emissions don’t go over that level even though individual participants may emit more or less than what they were allotted.