In this episode of the periodical podcast your host Tavis talks about tension in the Middle East, the plan to produce, and Russian winters.
Audio Transcript
Tavis Kilian: Hey there everybody! Recording early from Michigan on Monday March 1st as this is the episode of Monday Madness! Took a trip out to see a friend, and wanted to get this podcast recorded before I have to catch my red-eye back to Colorado. It’s gonna be a long day of travels, but thankfully travel is still relatively cheap. But you didn’t come here to listen to me talk about my travels, you came here for the best oil based news analysis that RARE PETRO always strives to give you. We will kick it off with our favorite statistics.
WTI prices are sitting at around $62 per barrel, but the daily spreads can be quite volatile. It is testing a limit around $63.50 and I am confident it will break through that soon. Even though we saw a small crude build (more on that later) there are plenty of factors providing upward pressure. Overall diminishing inventory totals, cold weather, economies reopening, and copper prices just to name a few. If the copper prices point confuses you, be sure to read or listen to last week’s periodical podcast detailing the relationship between copper and crude prices. Bullish stuff that is fun to read. Anyway, back to WTI prices. If anything is going to push prices down, it could be the repealing of production limits, so I see the price holding around here for at least a few days. Just know that we are hitting prices that are higher than what they were just weeks before COVID caused its dramatic plummet.
I’m excited for the rig count report because my prediction of stagnant to slowly growing production has stayed strong since Biden announced the federal drilling moratorium! Last week we saw a net change of 0 in the US, so I felt this week had the best chance of breaking it. I stood by my prediction, and the numbers show that there was a 5 rig increase! I still believe that rig count will continue to improve on this 0-5 scale through March, but past that I can’t exactly be sure. As for the nitty gritty, Texas put up 4 rigs in the Permian as they come off of that devastating freeze good on them. But 4 rigs in the Permian leaves us with another rig somewhere else… It’s time for the “Second Place Stud of the Week!” If you haven’t been with us the past 2 weeks, you should know that the Williston basin has been seeing the next most growth behind the Permian, but this week the title goes to the Marcellus basin! They were the only other basin in the states to put up a rig last week bringing them from a total of 30 to 31 for that solid 3.33% increase. Congratulations to our winners up in the northwest for securing the coveted “Second Place Stud of the Week.”
With everything cold, infrastructure failing, and economies getting back to business, it would only make sense that crude inventories are still being drawn on. Unfortunately, we live in a world that is not strictly guided by intuition. The API reported a 1 million barrel build, and the EIA reported 1.3 million barrel build. We’ve been doing well for a little over a month now as the last build occurred near the end of January. Really, these aren’t terrible numbers. It’s as close as you can get to neutral without actually being neutral, so I almost want to say that things will continue to be drawn upon by the next report. For example, utility companies in the west and midwest saw suppliers hike their prices over 8500%. A dekatherm, or one million btus, of natural gas was selling at $3 before it spiked to $263 in Minnesota. I mentioned last week how utility companies are usually prepared for historical lows, but the freeze that swept the nation proved to be just a little too much. Utilities worked through everything they had pre purchased at fixed prices in order to hedge some of their supply, but still quickly exhausted it. I even received an email from my utility company, Xcel, who warned that prices would likely increase in the next few years. Utility companies don’t make profits on natural gas, but they are able to pass costs to the consumers. CenterPoint estimated Wednesday the average residential heating customer will pay an extra $250 to $400 for the price shocks unless there’s some type of federal intervention. That cost would be spread across 12 months, most likely beginning in September of 2021. So while crude inventories may be up a million barrels, lots of other inventories are rapidly decreasing. I predict a rather decent draw on the next set of reports.
Before we get into stories, a quick update to 2 weeks ago. I had mentioned how there were missiles flying from Iranian militia groups to Saudi facilities that were thankfully intercepted. Well, that is not the last of it. The United States has now returned fire with an airstrike landing in Syria where it is believed 2 Iranian militia groups are located. Over the past week or so, a volley of missiles has been launched into Balad Air Base north of Baghdad, and a couple more landed in the international zone near embassies. The US’s response was intended to demonstrate that it wasn’t afraid to defend itself from these attacks, but some are worried this will only escalate tensions in the middle East.
Next up, some news that directly relates to energy markets. When we were in the thick of 2020, OPEC pledged initial production cuts. Those lasted for months, and were even extended in early 2021. Today OPEC+ have removed some 7 million barrels per day that would have otherwise been produced, but we are coming up on the next meeting that could change things. They plan to meet on March 4th where they will begin to discuss lifting restrictions and raising output by up to half a million barrels per day. Makes sense to me. Markets are recovering, prices are increasing, and those in OPEC rely pretty heavily on resource revenue, specifically that of oil and gas. Now, there is no doubt in my mind that this will shock prices in a negative way, but I would be surprised if WTI was affected too much. Of course, there aren’t lifting all restrictions as that would just crater the market, but I do think WTI will take a dip whenever the press releases the results of their decisions. Either way, the OPEC+ group has come a long way since it started production cuts. I remember back in early Q3 of last year where countries had a pitiful compliance percentage. I’m talking less than 50%. Nowadays, things are going incredibly well. Numbers from December show 101% compliance. Think that is impressive? January reports estimate 103%. That is a result of 108 percent of all OPEC members and 95% from non-OPEC members, or the “+” of “OPEC+.” 95% doesn’t sound too bad until you consider the fact that Russia and Kazakhstan were given permission to raise oil production by 65,000 bpd each in February and March. Deputy Prime Energy minister Alexander Novak said that Russia is aiming for 100% compliance at the beginning of February, and should definitely be able to achieve that given their generous production increase.
But what if Russia’s production was not limited simply because they chose to? Well, it’s just a theory I’d like to take the time to hash out for this episode. We all knew it got cold in Texas, but it got even colder in Russia. Sure things are normally cold there, but lately it has been bitterly cold reaching temperatures low enough to freeze oil and gas in its tracks, even though plenty of the infrastructure is outfitted with the appropriate weather proofed tech. Remember how I mentioned OPEC gave Russia permission to lighten its load in terms of production limits? Well they couldn’t even produce enough to compensate for that growth. They did experience a bit of growth in January, but the low temperatures caused them to lose 77,000 bpd between February 1st and 25th. Fortunately this means that Russian condensate and other petroleum products will be a little bit more expensive for the time being. On the flip side, this is just one of many many stories that highlights the more and more infrastructure that is frozen. This is another one of the reasons I’ve bet that prices would rise though this week, and I’m excited to see if I’m correct.But that is all we’ve got for this episode! It can be tough to keep track of all markets news and the best research that is out there. Make sure to subscribe to the RARE PETRO network so that you may still gain exposure to markets and current events. RARE PETRO had some of the most bullish predictions for 2021, and lots of them are becoming true because we have found plenty of reasons to support our claims. Stay ahead of the curve by subscribing to our fresh ideas! As always, leave some reviews, contact us directly at podcast@rarepetro.com, and until we see you next time, take care everybody!