Monday Madness: March 8 ’21

In this episode of Monday Madness your host Tavis discusses OPEC+ commitments, Canada’s facilities upgrades, and Iran’s refusal to claim ownership of attacks or sign a new nuclear deal.

Audio Transcript

Last week I came to you from Michigan, but this week I come to you from Flagstaff Arizona! The warm weather up here is getting me incredibly excited for spring and summer, but I am sure we are going to get plenty more snowfall in Colorado. If there is one thing I have learned about living in Golden for a while now, is that the first signs of spring are always false, and a nice big blanket of snow is just around the corner. But you didn’t come here to listen to how much fun I’m having in the sun, you came here for the biggest news in oil and gas for the week along with those incredibly telling statistics, so let’s get going!

Now it is early early Monday morning as I record this. Gotta get packed up, head down to Phoenix, meet some folks, and catch a flight, so markets aren’t exactly open yet. That’s not to say that there isn’t anything to talk about as prices have yet again jumped several dollars in the positive direction to hit a healthy mid $67 range. These prices jumped up high over the duration of Sunday before falling back down to high $65 by the evening. I will definitely talk more about factors influencing the price, but I do want to highlight that oil prices have not been this high since October of 2018. That’s almost 2.5 years!  Let’s even shorten the time frame. A month ago on February 8th, prices traded around mid $58. Nearly $10 in less than 30 days my friends. That is nothing to sneeze at. It seems like only a few months ago that we were stuck in the middle of oil priced in the $30 range. Oh wait, that’s because we were! It wasn’t until about November that oil broke $40 and began to run up. Pull up a WTI pricing chart for yourself and you can see that if anything, this is just the incredibly volatile energy market at its finest. The price is either going to go up, or go down, and RARE PETRO has maintained that prices were going up for quite some time now. If that hasn’t convinced you to subscribe to our content, then I don’t know what will.

I feel like we can’t keep this rig count game up much longer. My initial prediction right after the federal drilling moratorium predicted several weeks of growth or stagnation, and here we are several weeks out. We’ve seen everything from a solid 5 rig increase to last week’s measly zero, and I am quickly losing confidence. Fortunately, the most recent rig count shows a United States increase of 1 rig. Of course, the Permian retains its lead and adds 3 rigs as we’ve come to expect. But what of this week’s “Second Place Stud of the Week?” I can tell you that last week’s Marcellus will not be retaining their title as they put up zero rigs. What about the Williston basin who reigned for the last 2 weeks of March with an additional rig per week? They actually lost a rig leaving them as the biggest loser. This week’s winner is… Nobody. Kind of a bland rig count report to be honest. Outside of the Permian’s addition of three rigs and the Williston’s lost one, there were no other major changes basin by basin. If we look at it from a state perspective, Texas added 5, Louisiana lost 2, and both New Mexico and North Dakota lost 1. Not too surprising that New Mexico is losing rigs, and if you don’t know why, I highly encourage you to read or listen to Kevin’s periodical. It should get you all caught up. Overall, a very slow month for rigs, but we are well into this federal drilling moratorium, so hopefully the federal government comes out with some sort of word soon.

Lastly, the inventory report. Last week seemed like a bit of an anomaly with a 1 million barrel build in crude inventories despite the sweeping cold and increased level of trading and production. This week, we’ve got a repeat. The API released their report on the 2nd of March and it claimed a 7.4 million barrel build. Ouch… We were doing really well for a while. Personally I’m more partial to what the EIA has to say, and they released their report a day later claiming a 21.5 million barrel build. If that number doesn’t shock you, I’ll try to put it into perspective. The EIA has been reporting on inventory changes since 1982, and has never seen a build that large. Even when things got really bad for pricing last year, the biggest build we saw topped out at 19 and a quarter million in mid July. So if prices are climbing so high, why didn’t they respond to this record build? Well, there are a couple of things going on here. First, a big build in crude, but gasoline inventories absolutely plummeted. It was estimated that it would fall 2 million, but in reality it was much closer to 13.6. If you need to gas up, do it sooner rather than later because pump prices are already up as this metric is a good indicator of returning fuel demand. The second factor that may be propping up prices is the fact that OPEC+ has announced that they will be maintaining production cuts through the month of April, excluding Russia and Kazakhstan of course. Markets have had a strong rally for the past month, and that could be a result of something as simple as increased demand and diminished supply. Think about it, all the headlines out there (I’ll do my best not to spoil them) mention that oil supply is being suppressed by cold weather, governmental affairs, or other generally obscure reasons. Here’s hoping for another great week of oil ahead.

But that is enough of those statistics. For our stories I would like to start with our friends up North in Canada. Like I had mentioned, plenty of news that continues to push prices higher, and this is one of them. Almost 500,000 barrels of oil will come offline as three oil upgrader facilities are undergoing maintenance. In Canada, upgraders are much more common as they have to pull oil from their tar sands. The stuff is so thick and heavy that it requires a lot of additional energy just to extract, and once it gets to the surface, you have bitumen. It is very similar to processed asphalt in the sense that you can get it sticky and moldable when it is hot, but it is normally dense and tough at atmospheric conditions. Since it can only be used for blacktops and roofing, a lot of Canadian producers make use of the upgrader facilities to process it. They use fractional distillation to process the bitumen to a point of purity and mobility. By purity, I mean they do their best to remove as much sulfur, nitrogen, and heavy metals as possible. In terms of mobility, they are able to make it roughly 1000 times more mobile as they process the gasses out of the solids and break the superheavy hydrocarbon chains. When it is all said and done, you can get a good deal of energy out of the bitumen, but it emits a whole lot more than say, American gas that comes out of the Permian. Canadian Natural Resources, Suncor Energy, and Syncrude are all idling a facility each bringing off 250,000, 130,000, and 70,000 barrels per day offline. This announcement came at roughly the same time OPEC+ announced their cuts leading to exceedingly bullish expectations. Even though things seem to be looking up for worldwide energy markets, Prince Abdulaziz bin Salman cautioned, “Before we take our next step forward, let us be certain the glimmer we see ahead is not the headlight of an oncoming express train.” I have to disagree with the Prince here as I see nothing but increased fuel demand and decreased supply worldwide. Either way, this Canadian supply cut will be temporary and operations will resume, that’s not a concern. The biggest thing to be mindful of is emissions. Remember that refining process I described? Investors are looking towards much cleaner forms of hydrocarbon productions, so most of the focus has been placed on emissions reduction than production growth. This means that the industry in Canada is much more likely to lag behind other markets as they struggle to prove to environmentally conscious investors that their oil is just as useful and clean as everyone else’s.

Next up, an update to tensions in the middle east. As of this Monday morning, the US is responsible for 4 separate retaliatory attacks on Iran. Secretary of Defense, Lloyd Austin, said, “The message to those that would carry out such an attack is that expect us to do what is necessary to defend ourselves.” I’m not sure if that sentence is grammatically correct, but regardless, this is in response to those Iranian missile attacks from last week that targeted facilities with US troops inside. Iran has denied all involvement, but that does not mean militia groups could be acting autonomously. Lloyd Austin also mentioned that if this happens again, Iran should expect additional strikes. The most recent strike was conducted by B-52H bombers, alongside aircraft from Israel, Saudi Arabia, and Qatar. If we stay within the realm of energy, it would be an injustice to not mention how last month Iran rejected an invitation to renegotiate its involvement with a nuclear deal. To be fair, Trump removed the United States from the deal way back in 2018 calling it a terrible deal, but I don’t think any domestic nuclear projects came from that decision. Iran on the other hand has been enriching uranium since then and has done little except allow routine inspections of facilities. The United States has imposed sanctions to incentivize them to return to the deal, and even Biden planned to uphold them, but Iran says it will only return if the United States fully complies and lifts all sanctions. Quite the nuclear Mexican standoff. I could sit here all day and talk about these relations. There’s been assassinations of nuclear scientists, top military officials, but I really do encourage you to look into that for an afternoon or so should you have the free time.
But that is the end of this episode! I know the statistics got a little long as it let me break into the OPEC+ production cuts, but RARE PETRO doesn’t want you to simply know what is going on. We want to probe you to think about why. If you would like to think a little more about the great big world of energy markets, check out the RARE PETRO periodicals I mentioned. We didn’t will prices to increase, we just look for all the hints and patterns that may let us peek into the future. Additionally, we love your feedback. Leave a review on whatever platform you are listening through, and if we haven’t acknowledged it, you can contact me directly at podcast@rarepetro.com. After all, we are doing this for you. Thank you for your time, and until we see you next time, take care everybody.

Music: https://www.bensound.com/royalty-free-music

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