In this episode Tavis analyses the price boom, the treacherous environment under Newsom, and Iran drawing the nuclear curtain.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on September 25, 2023. Where does the time go? This will be the last episode of Q3 2023. It feels like not too long ago we were loving triple digit oil, but that time has been long gone. But who knows, perhaps the next $100 barrel of WTI could be seen before the end of this year. If you extrapolate some short term data and look at world events I believe that is likely to be true. But you might be listening and saying, “Woah! Hold on, how can you say that?” Well my friend, you might be new to the show or a seasoned listener but this show is all about looking to the future, and we do that by analyzing the past. Everything can be cyclical so we review the most revealing statistics and impactful news stories that continue to push that needle. I think it’s about time we get into that content right now.
First up, commodity prices. This time last week we were looking at a $92 barrel. From there the price went down to just below $89 on Thursday by popping back up to $90 before the week ended. Today we are seeing a bit of volatility and we are at $89.58, but this will be a very important next 24 hours. We need to see how the price reacts to dipping below. It bounced back from $90 once already and is back again. As a matter of fact, I wrote this script while looking at the price chart and since I wrote that last sentence the price jumped back up to $90.05. That is a violent movement in such a short amount of time. I believe this confirms the hypothesis that $90 might be the new floor, but let’s not celebrate just yet. Wouldn’t want to look like a bunch of fools now, would we? Brent is moving in a very similar manner, but since last Friday we are seeing a more aggressive than usual spread. We’ve seen a $3-$3.50 spread recently which is arguably narrower than it should be. Now we are seeing a bit of a correction to that spread as it reaches $4, but very quickly. You don’t typically see 10s of cents in change in just a few days. This might take away from some of the upward pressure on WTI, but I maintain confidence. Natural gas is downright upsetting at this point. $6 gas isn’t that far in the rearview mirror, yet we are seeing gas barely increase its trajectory. It bottomed out at $2 in April, and only set a max of $3 just about 10 days ago. I suppose that is better than nothing and the stability is nice, but I want to see some crazy gas prices again. At least we have some cool things going on with the oil prices.
Next up is the rig count. Last week we saw the largest increase in months. 9 new rigs which topped the previous record of 1 for almost the rest of 2023. But for each action there is an equal and opposite reaction, and this week we see that violent reaction of 11 fewer rigs. That drop brings us to 630 total rigs which leaves us with 134 fewer rigs than we had last year. Basin by basin the Ardmore Woodford and Granite Wash each gained a rig, and they were the only two. The Cana Woodford lost 1, the Haynesville lost 2, and the Permian lost 5. This leaves the Permian down only 27 since last year, so perhaps the mecca is finding some stability. State by state Wyoming and Utah are down 1, New Mexico and Oklahoma are down 2, and Texas is down 5. Almost all of the rigs that were laid down were looking to find oil in horizontal wells. This could have been just a few brief projects for companies looking to temporarily boost some production given the recent increase in oil prices. Nothing too incredibly insane considering this has become the norm for the past year, though 11 fewer rigs is a bit more aggressive than usual. Keep your chin up because I think this statistic has good things coming early next year.
Our last statistic to review is the Thirsty Thursday inventory report. It is best enjoyed with the weekly cocktail recipe on www.rarepetro.com along with the great visual aids to truly enhance your understanding. If you missed it, here’s the quick and dirty: After a brief relapse into builds the EIA was confident we would experience a 2.2 million barrel draw and they were nearly right on the money as it was reported just 65,000 barrels less. Not bad EIA, not bad. The API started the celebrations for the 21st a little early and predicted a bit of a bigger drawdown at 2 and 2/3rds a million barrels but ended up doubling their predicted with the actual results at a 5 and a quarter million barrel drawdown. As I mentioned last week we have witnessed a pretty standard pattern of a few weeks of draws, and one week of a build before cycling through that pattern. After last week’s build it seems we are still on track though next week could very easily be yet another build. Patience will be key. As far as historical levels of crude for this time period we are well within the territory, though the general trend would put it in 5-year historical lows by mid October. Total gasoline inventories decreased 800,000 barrels after that massive 5.6 million barrel build we saw last week which lives in the the lower 1/3 of historical normal territory for the past 5 years. This is not likely to change soon as the minimum only continues to get lower and the range widens considerably leading into the holiday season. Gasoline prices are starting to stagnate as they increase only over a cent from last week. Diesel has gotten to be 5 cents more expensive. Gasoline was going sideways for a bit, but now it looks like we are doomed to look dead down the barrel of increased costs. The most expensive gallon remains in California as they enjoy their expensive summer blends at $5.792. Governor Gavin Newsom hopes to change that soon by installing a fuel markets watch dog that is supposed to sniff out any price gouging. It is likely to ironically make gas more expensive. Mississippi continues to enjoy the cheapest national gallon at $3.292. Distillates saw a slight drawdown pulling its total closer to the minimum of the 5 year historical range, but the floor is about to drop out from under it to give it some more breathing room. Propane sits at record highs and much like a cat in a tree, refuses to come down.
But that brings us to the end of our statistics. Now it is time to get into some news. The first one is a bit different as we are not focusing on a country or conventional energy company, but Lego. If you didn’t know, two years ago Lego revealed that they planned to produce plastic bricks from recycled plastic bottles rather than straight oil based plastic. They were “super excited” about making these bricks from recycled polyethylene terephthalate. Since then they have been performing research on how it would relate to emissions, energy involved, and product quality. Unfortunately, they discovered it would have a negative impact on all of these factors. According to Lego’s head of sustainability Tim Brooks Switching from ABS to recycled PET would have to entail changes in the manufacturing process and factories, which would have meant higher carbon emissions overall. Now they have pivoted to researching brick manufacturing with bio-based and recycled material, but if I had to guess that likely won’t have much of a positive effect either. They did reach a deal with a pharmaceutical company earlier this year, Novo Nordisk (also Danish), to work with a renewable firm to produce methanol from renewable energy rather than conventional plastics. This doesn’t come off as surprising to me because conventional hydrocarbons are used for manufacturing worldwide for a reason: they are cheap. To go out of your way to recycle old plastics and make a worse product only sounds like it would end up generating more emissions. I wish the best for Lego, but I just hope they keep the product affordable. I was curious about this so just as an aside: I found a project that looked at the price per part since about 2000, and everything has been mostly consistent, or in the case of some sets, has gotten cheaper since then. I suppose this is great news for my roommate who just started his most recent Lego project: the Concorde Airbus (a scale model of course).
In more serious and professional news: Harold Hamm of Continental Resources has some words on the current administration and its regulation of the industry. This is a topic that Drs. Jennifer Miskimins and Jim Crompton recently wrote an opinion piece for the Colorado sun, and I believe Hamm was recently at the School of Mines speaking to current petroleum students. Hamm claims that the current US Administration’s policies around our industry are like “riding a rollercoaster.” He said this to politicians and other execs in Oklahoma city before an energy summit. He said, “It’s so important that we have an energy policy that’s lasting and somebody can’t tinker with it from one administration to the next.” He’s been critical of the recent administration since it took office. When gasoline prices spiked amid the Russian-Ukraine conflict, Hamm said that it was frustrating to not have the flexibility to get federal permits and more leasing to produce more abroad to aid in the price shocks. A great point to make when you have governments like California’s claiming “Big Oil” is taking advantage of the common American through price gouging. “When the federal leases were pulled off the table with this latest administration, it took a full year just to modify everybody’s drilling plans,” said Hamm. This just begins to scratch the surface, but it is certainly a shared sentiment across industry. I don’t think most oil companies are against the idea of working to produce cleaner and safer oil and gas, but this yo-yo action in regulations can be incredibly frustrating. It is hard to continue to meet expectations when they are constantly fluctuating in requirements. For example, the Biden administration okayed permitting in Alaska in the willow project, but just recently announced they would be banning leasing in nearly half of the Alaskan oil reserve. Companies likely started laying the groundwork and planning for lots of these projects in the months they believed they would be able to execute. Imagine how frustrating and expensive it is to do all this for the rug to be yanked out. Consistency will be key, and slow change is what we need, but it seems the energy landscape (conventional and renewables alike) is shifting far too rapidly to achieve any stable growth. I don’t know what the future entails, but I am very excited to see how energy is managed by a new administration. Fingers crossed, I guess.
But folks that is all we have for today. If you want more content, our website is chock full of it. Old podcasts, periodicals, and video interviews dating as far back as 2019. Lots of good stuff, and a constant influx of news from some of our favorite sources. Otherwise, keep doing your best to become the best possible professional you can be, and an easy way to do that is follow this free podcast. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!