Chickens “come home to sleep in the slate field”.

Welcome back to the energy source.

First of all, drop what you are doing and read this North Korean oil smuggling investigation; It features triads, ghost ships, and underground banks.

I’m biased, of course, but the Financial Times has been throwing the ball out of the park with big stories lately, from Jamie Dimon to Credit Suisse to SVB. It is precisely this study, however, that deserves all the praise it gets.

Meanwhile, the rebound in oil prices continued yesterday after the vicious sell-off earlier this month, with Brent falling half a percent to $78.28 a barrel. WTI is settling at a similar level at $72.97/barrel.

A rise in the dollar could be to blame. But considering U.S. crude stockpiles collapsed last week, Russian production fell, and operators in Iraqi Kurdistan began shutting down production while pipeline exports to Turkey were halted — all usually bullish signals — it always has to still give a lot of bearish sentiment market to send the major benchmarks back down a bit. Does the oil market know anything about the economy? Please weigh: derek.brower@ft.com.

We’ve been reporting on the poor prospects in the shale patch for months. The mood will certainly be dark. Yes, last year was a record year with record cash flows. But cost inflation is wreaking havoc on profitability, and premium acreage is getting thin. Troubles at one of the world’s top swing suppliers should also be a recipe for higher prices. But as Myles writes below, even shale executives have become more gloomy about the commodity.

In Data Drill, Amanda provides an introduction to what to consider as the Biden administration prepares to clarify rules that will allow US battery makers to receive the huge tax credits on offer. The announcements are due this week. Billions of dollars in investments – and the pace of electrification in the US – are at stake.

Thank you for reading. — Derek

“Chickens seem to come home to settle”

Things are looking increasingly gloomy in the slate field.

Engine room growth in the US oil sector virtually ground to a halt in the first three months of the year.

At least that’s the conclusion of the Dallas Federal Reserve’s closely watched industry survey Results of which were published yesterday.

The Fed’s business activity index — an indicator of sector sentiment — slipped to 2.1 in the first quarter of this year from 30.3 at the end of last year. This suggests that growth has hit the brakes (anything below zero is a contraction).

As we have been reporting for months, the slate field’s problems have been increasing for some time, despite the high prices last year.

Service cost inflation continues to run rampant; the cabinet with decent drilling surfaces becomes patchy; investors insist that virtually every penny earned is returned to them; and prices have fallen well below last year’s highs.

Added to this is a banking crisis that has raised concerns about the future of demand and the availability of capital. The mood among executives was gloomy.

“The road ahead looks difficult but passable,” said one executive, adding:

“An estimated 30 to 40 percent increase in costs in field operations, higher interest charges on borrowed money, a sharp drop in natural gas prices combined with lower crude oil prices resulted in noticeably lower cash flow. Service company capacity is fairly limited in select basins. Outside investors appear to be losing interest in hydrocarbons. The global macroeconomic and political outlook is deteriorating.”

The fact that the survey was conducted in the midst of the recent banking crisis will certainly have weighed on sentiment as many executives fear credit is becoming increasingly difficult to obtain. As one put it:

“Current low oil prices coupled with bank fears will make it difficult for smaller, undercapitalized companies to continue as usual. There will be harder credit and lower reserve values ​​due to new price decks.”

But even if the turbulence in the financial world abates and oil prices firm again, the optimistic mood will be limited. Three executives surveyed explicitly mentioned the prospect of a recession.

Recent optimism that oil would soon surpass $100 a barrel – the same optimism that Justin reported this week caused operators to dump some of their hedges – has faded. Executives expect oil to end the year just below $80/barrel.

Indeed, the combination of weaker prices and rising costs has, for some, brought today’s price uncomfortably close to the price needed to break even. On average, operators say they now need a WTI price of $62/b to drill profitably, up from $56/b last year. Even in prolific Permian, home of the US’s best acreage, the break-even price for new wells is up $9 to $61/b.

The malaise underscores shale’s departure from an influential position in global oil markets — no longer the old juggernaut swing producer.

As one executive quipped, “Chickens seem to come home to settle.”

(Myles McCormick)

data drill

All eyes in the US auto industry are on the Biden administration this week as it prepares to release long-delayed guidance on the EV tax credit.

The landmark Inflation Reduction Act included a $7,500 excise tax credit to increase EV adoption while boosting domestic manufacturing. An electric vehicle eligible for the full tax credit must source at least 40 percent by value of its critical minerals from the United States or U.S. Free Trade Agreement countries. At least half the value of battery components must be manufactured in North America.

It’s a tough task considering the US did it practically no mining capacity for critical minerals such as lithium and cobalt and produces 1 percent of the world’s anodes and cathodes, according to an analysis by the International Energy Agency. Shutting out non-free trade allies like the EU and Japan has also worsened trade relations, which the US is trying to fix.

“[The Biden administration] has the Goldilocks situation of having to find a policy strict enough to encourage investment. . . without being too harsh, where automakers just throw up their hands and say it’s not worth it,” said Corey Cantor, senior associate of electric vehicles at BloombergNEF.

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Here are important provisions to be aware of:

• Define critical minerals: A decision on whether to define anodes and cathodes as critical minerals or battery components will determine where developers can source materials. Developing them like the former would allow manufacturers to source materials from outside North America as long as they are in free trade countries. Some US companies and unions stress that a flexible interpretation would risk moving manufacturing jobs abroad.

• Define free trade agreements: How the Treasury defines a free trade agreement will clarify whether Japan and the EU (US allies that have never signed an official free trade agreement) will be included in the tax credit. The US signed a critical minerals deal with Tokyo on Tuesday and is working on a similar deal with the EU. The workaround has been censured by members of Congress for bypassing the legislature’s role in international trade.

• Commitment in China: Whether the Treasury Department takes a tough approach to shipments linked to “foreign entities of concern” is being closely watched by automakers. The IRA states that all materials extracted, processed or manufactured in affected foreign entities (North Korea, Russia, Iran and China) are excluded from the tax credit. But China dominates global electric vehicle manufacturing and has played a role in building the US supply chain.

(Amanda Chu)

power points

Energy Source was written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Find out about past issues of the newsletter Here.