A look at the puny roster of folks who can step in for Russian supply… are we doomed?
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Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on May 9th, 2022. Today is victory day for many folks in Europe who are celebrating their defeat of Nazi Germany. The world watched and held its breath hoping there would be no big news from Russia. So far the only news I can see is that the Russian ambassador to Poland had red paint thrown on him during a parade to symbolize the blood on his hands… so I guess that’s about as good as news as we can hope for, huh? Regardless, you didn’t come here to talk about war and politics outside of the context of energy. That would defeat the purpose of calling this the RARE PETRO podcast. Instead, let’s look at the biggest statistics and stories within the world of oil and gas.
Commodity prices have taken an absolute beating today. Not only that, but crypto and conventional investments as well. It seems that some of the aforementioned red paint tossed on the Russian ambassador has spread to all markets. WTI has fallen 6% to $103 which is still a very reasonable price. Brent is only down 5.8% to about $106. Natural gas has taken the biggest blow as it falls from over $8 to almost $7 flat. That is a 12.7% plummet. I can’t pinpoint exactly what news is causing all of this, so it is possible that world markets are just trashed right now and that trickles to commodities. Fortunately this will likely mean that we can only go up in coming days, but as you know things could change at the drop of a hat. One good news story could send the price into the stratosphere of or subterranean. For the sake of your mental health, I advise you just chalk this day up to a loss and come back tomorrow.
Next is the rig count. While the international and Canadian counts are down, the US is up 7 rigs to a total of 705 rigs. That’s right ladies and gents! Back up above 700. While still a far cry from more than 1000 rigs from better days, it is steady marching progress in the correct direction. This week it is the Marcellus who adds on the most rigs at 2. The Granite Wash, Haynesville, and Mississippi each added one rig. It was only the Canawoodford who lost a rig. Surprisingly, state level data shows that Texas lost a rig, along with Alaska. Otherwise, Louisiana is up 4 rigs, Oklahoma and Pennsylvania up 2, and New Mexico up one. These new wells are equally split between directional and horizontal hole targeting oil. The big shocker this week is that the Gulf of Mexico gained itself 3 new wells on the week pushing its total from 13 to 16 which is especially surprising considering that the Gulf’s hurricane season begins in May. Either way, a beautiful rig count to contrast the rather poor commodity prices.
Our last statistic to visit is the inventory data. Of course, check out www.rarepetro.com for the full experience, but here is what you may have missed. Inventory reports in recent weeks have been all across the board. The EIA was expecting a drawdown of less than a million, but it turns out they weren’t even close to being right. The reported build is much closer to 1.3 million barrels. Ouch. The API was feeling much gutsier with a predicted drawdown of more than a million barrels. They instead reported a drawdown of 3.5 million! At this point, there is little to no recognizable pattern when it comes to the inventory report. Build or draw, we see it all. Either way it goes, we are still below the historical 5-year average by a few million barrels. I know that Europe has a problem on their hands with quickly increasing commodity prices, but let’s hope that the facilities and supporting natural gas structures are constructed successfully and are up to safety standards. Gasoline inventories decreased by another 2.2 million barrels for one of the bigger decreases we have seen in recent weeks. Hopefully it begins to level out soon because we are fast approaching historical lows, and that will certainly not have a positive impact on US fuel prices. While we were fortunate enough to see 2-6 cent drops week by week over the past month and a half, the trend seems to be reversing. A gallon of regular is now more than 10 cents more expensive than it was a week ago. But this is not a problem exclusive to gasoline. Commodities of all kinds are going up in price, especially if they are distillates. While US distillate inventories are in fact lower, it is a problem that the world is sharing right now. Asia was struggling first, but the problem seems to have spread to everyone. Diesel is becoming as rare as diamonds on the East coast and the US government will have a problem on its hands if it cannot find a way to solve this by winter. The most likely culprit for the shortage is a result of East coast refining capacity dropping to nearly nonexistent levels this year. Just because the refineries aren’t there doesn’t mean folks aren’t going to use it.
This wraps up our usual statistics, so it is high time we peek at some current events. I would love to talk about grid operators bracing for a wave of blackouts in the US, but we already touched on that in the episode of the wacky world of energy that will be released this Wednesday, so keep your eyes peeled for that. One thing we didn’t discuss is the lack of potential producers to pick up Russia’s slack should sanctions and threats go through. At this point, it is no secret that the US has been making calls to everyone and pleading with them to produce more. While Saudi Arabia is no longer responding to the Biden administration it does make you wonder: Who will step in for Russia to cover some of the 2 million barrels of crude and 1 million barrels of refined product every day? Well there is a roster of folks who could contribute, but it is rather small.
First we have Saudi Arabia and the UAE, the two most obvious candidates. These two make up a fat portion of OPEC’s total production of roughly 2.5 million barrels per day. If Saudi Arabia isn’t interested, could the UAE play ball? If they don’t produce a larger quantity of oil, they are only left with one option. They could redirect shipments from the Arabic Gulf to China. Where would they redirect? Potential Europe, but this would come at the cost of its good relations with buyers in the region, primarily China. No matter how you break it down, the Kings of OPEC will likely not be stepping up to the plate.
What about Iraq? Some analysts believe that they could pump an extra 660,000 barrels on top of the already existing 4.3 million barrels per day. Unfortunately, two significant obstacles stand in their way. The first is political turmoil after a “west-friendly” candidate was suspended from the presidency. This has pretty much brought all political progress in Baghdad to a screeching halt. Second, Iraq doesn’t really have the infrastructure nor investment to justify such a large increase in production leaving them many years out from even being able to consider producing more. No point in bringing more to the table if it is produced at a loss.
We are quickly running out of folks to call on for more production. Perhaps Libya can help out… if they are able to sort out the constant interruptions to their oil production. Disgruntled political groups are blocking access to major fields and export terminals which has taken some 550,000 barrels off of the table. Between years of inactivity and force majeures on various fields, Libya needs to first save themselves before they can contribute more oil to the world.
The last candidate to consider is Iran. They are so close to being able to service the shortage of oil, but they are stuck negotiating the terms of a new nuclear deal that will hopefully lift sanctions that the US holds over their oil. Analysts believe that Iran could contribute an additional 1 million barrels per day with no US sanctions which would do wonders for the potential Russian shortage. Still, I wouldn’t hold my breath because this has been a point of contention between the US and Iran for YEARS. I don’t anticipate any magical resolutions presenting themselves soon.
So, we’ve looked at some of the most prolific oil producers in the world and learned that they too have their own problems that prevent them from, “turning on the taps,” as the headlines say. Who else can service this shortage? Well why not the good old US of A? A nation of private and public companies doing their best to produce some of the most environmentally friendly oil in the world, and at an easy profit considering the high commodity prices. We are equally as close as some of the other contenders, and the only thing standing in the way of achieving this dream is a government full of folks who have bought into the biggest and most economically impactful lie of our time: oil is bad. If we are somehow able to overcome this stigma, the US would realize that it could really benefit from a bad situation. We could work to produce energy, infrastructure, and terminals for the transportation of hydrocarbons to those who truly need it. If we don’t do it, I’m sure someone else will eventually. It would just be an absolute shame to see an opportunity like this slip through the cracks.
Ultimately, the US is in a very unique position when compared to a lot of these other countries. I hope our current leaders are able to wisen up to the madness, but we will just have to be patient and see how it plays out. Either way, you and I as energy professionals will likely benefit from whatever happens. Oil is a practical commodity that the world not only demands, but takes for granted. Make sure to stay up to date on all things industry related by fracking that follow button. We release content almost every weekday, so keep an eye out for us on LinkedIn and on our website www.rarepetro.com. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!