In this episode of Monday Madness your host Tavis walks you through some important statistics, Texas mayhem, and Iraq’s hindsight.
Audio Transcript
Tavis Kilian: Alrighty everyone welcome back! This, of course, is the voice of Tavis Kilian here with RARE PETRO to bring you yet another episode of Monday Madness. Today is February 22 and things for our friends down in Texas seem like they are finally starting to look up as a lot of the state thawed over the weekend and hits the 60s and 70s today. Definitely talking a little bit about that later, but if anything, that week highlighted the importance of having a reliable and weatherproofed grid, even if these weather patterns only happen once every ten years. But hey, I’m getting ahead of myself. Those of you who have been long time listeners know that this podcast has structures. We have traditions! So it is only right that we hop into some of the most important statistics.
I want to make a correction from last week. When discussing WTI prices, I mentioned that markets were closed for a holiday, but oil still trades! Well, even though oil was being carted around all over the world in the process of being physically traded, futures markets also observe holidays and were closed for trading, so I was factually incorrect. Just a little update because we value accuracy and facts here at RARE PETRO. Now for this week’s WTI prices. At the time of writing the script fo this episode, WTI prices are just barely over $61. I definitely expected this price, or even natural gas to be a little bit higher, considering that electric supply in the South was so short that a veteran in Dallas was charged $16,752 for his non-fixed bill. That being said, that is a relatively small event on the global scale, so if anything, it provided enough pressure to maintain above $61 pricing. *Laughs* Look at me! WTI prices were only $53 a month ago, and here I am getting greedy for more. While I definitely don’t want to look a gift horse in the mouth, I feel the WTI pricing is solid and due for more growth in the near term.
Next up, the rig count. We are now about 4 weeks from when the federal drilling ban was announced, and my prediction of steady to slightly increasing rig counts for several weeks still holds. We are definitely not seeing the type of activity growth we saw at the end of last year, but it is growth nonetheless. The most recent drilling report reveals… nothing. A change of zero. My prediction still holds, but is this the end? I would be surprised. I think we still have a couple weeks of limited growth ahead of us, but I don’t know for how much longer. I wouldn’t be surprised if we reached the end of March with 0 to 4 rigs gained per week as Texas needs to replace some of its lost production, but I also wouldn’t be surprised if the start of March introduced some dwindling numbers. As for the nitty gritty details, Alaska and Louisiana lost 2 rigs outside of their major basins, so no unusual activity there. Fortunately we were able to count on the Permian to somehow put up 1 rig this week despite the bitter cold. Very impressive to those of you in the Permian, but the Permian almost always wins. It is time for the “Second Place Stud of the Week.” The only other basin to put up a rig instead of going steady was North Dakota’s very own Williston Basin! Remember who won last week? That’s right: the Williston basin. Our reigning champion brought their total from 13 to 14 rigs for that 8% increase. Congratulations to them for finding a way to grow in the current political climate, and weather climate for that matter.
Lastly you know we have to touch on those inventories. The API’s most recent report claims a 5.8 million barrel drawdown. Incredible! The EIA followed up with another report claiming a 7 and a quarter million barrel drawdown! These are stellar numbers. More and more economies are starting to reopen with vaccine distribution, and nations are consuming more oil on the daily. Now, there is one other massive factor to consider. While exact numbers are not known, Texas alone could have shut in 4 million barrels per day of production, and a lot of that may not return on its own. We will talk more about this in our news section of the podcast, but this is an incredible portion of American production to be halted. I’m predicting more inventory drops in the future, and if you weren’t bullish on an oil return before, I don’t know what can convince you. I mentioned last week that domestic inventories were finally dropping into a 5 year average, and the EIA’s data shows that we are now slightly below the median, and quickly dropping. The last time we had inventories this low was of course on that huge climb thanks to COVID, but before that: July of 2019. I cannot stress this enough. We are currently at a normal domestic inventory level, the states likely lost a significant portion of their production to the freeze, and inventories were already headed down before that. I think oil prices are likely to rise more very soon.
But geewhiz. I’ve spent too much time looking at our weekly statistics. It is high time we moved onto our stories.
Like I mentioned, the range of daily production in Texas is in the neighborhood of 5 million barrels per day, and anywhere from 2-4 million is currently shut in, or simply frozen in pipelines. Producers speculate it could take at least 2 weeks to get everything back to “normal,” but of course, lots of this production is unlikely to come back naturally. Typically, E&P companies are able to “weather the storm” (no pun intended) but the sheer scale of production affected is historical. The problem lies in the fact that there was just not enough power to supply to compressor stations, so everything is backed up. It’s not as simple as turning the power back on either because there are still plenty of frozen roads & lots of broken infrastructure. It is expected that production could be back at 50% this week, but may not recover to 100% of pre-storm production until well into March. JP Morgan analysts estimate the lost production for the month of February will total 16-18 million barrels. That’s more than 3 times the daily statewide production of Texas. Makes you wonder, “What are the plans for weatherproofing in the future?” Well, while this was a 30 year low for Texas, and not even the first devastating freeze of the past 2 decades, many consider producers are considering this to be a once in a century event and unlikely to dump money into their infrastructure. As John Kildruff at Again Capital puts it, “It’s a cross benefit analysis. They’re thinking, how often does this happen, are we going to deal with this once a decade? It’s not really worth it for them to guard against an outlier event.” It’s tough to argue with that considering we just came off of 2020 and many of these companies don’t have enough free capital to dump into projects like this if it isn’t likely to happen in the next 10 years. I mean, from a career lifespan perspective… Let’s say your boss comes in, throws a report on your desk, and says he needs it finished in the next 20 to 30 years. Pretty easy for all parties involved to kick that can way down the road. Plenty of E&P companies can stomach a weeklong production outage, but we can’t expect people to sit through a week of rolling blackouts when temperatures sit at negative 6. Let’s hope ERCOT addresses the issue and is prepared for the next time this happens.
Now I could spend the rest of this episode talking about issues in Texas, but I think we are running out of time today, and I want to provide a wide buffet of energy stories, so let’s move on to some international news.
Many weeks ago I had a story talking about Iraq’s pre-paid oil contract with China. At the time, Iraq was concerned oil prices were going to remain depressed for quite a while, so they were offering long term prepaid contracts. China decided that it may be a good idea to secure a steady contract for their defense subsidiary Zenhua. Zenhua is owned by the state defense corporation Norinco. You can sort of think of the corporation as a Chinese Lockheed Martin. Norinco has a refinery capacity of 120,000 bpd, and this deal with China would allow it to lock into 5 years of cheap oil. Iraq had debts to pay, and was doing its best to creatively circumvent OPEC+ restrictions with these contracts in order to bring in more money. A $2 billion dollar contract was finalized. They both agreed to the terms. Fast forward a few months to today. Oil prices are making an incredible rally, and Iraq is trying to go back on its word. Energy minister Ihsan Abdul Jabbar said, “We had concerns that oil prices would not rise above $40 when we announced this deal for the first time in the history of Iraq.” Now they see that they have provided China with a godlike deal on oil and are losing out on massive potential profits. To me this is hilarious as it backfired and Iraq is scrambling to recover potential losses. It’s a contract for God’s sake… kind of hard to back out of those, especially when China already gave them the $2 billion that they asked for. If they are somehow able to cancel it, their first pre-paid contract would be the laughing stock of the middle east and many people would likely not take them up on a similar deal in the future. If they go through with it, the losses will be substantial, and China will have made off like a bandit. They should have listened to RARE PETRO’s bullish predictions to know that oil would not sit in the $40 range for 5 years.
But that is the end of this episode! You can avoid making the same mistakes Iraq made by subscribing to this podcast, written periodical, and basin news all available on rarepetro.com. Imagine if you walked into an interview and were able to regurgitate all of the information that RARE PETRO puts out. You’d definitely have an edge over someone who only spent their time applying to jobs. Also, an important update. We will be adding transcripts from Monday Madness segments to our website page, so if you have any hearing impaired friends, please let them know! We want this content to be accessible to everyone. But, that is all I’ve got for you. Thank you for tuning in, and until we see you next time, take care everybody.