Record-breaking statistics, a desperate UK, and the fact that OPEC peaked.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you a fresh new episode of Monday Madness on April 11th, 2022. I’m not sure if you have heard the good news yet, but the RARE PETRO media team has been releasing a new segment called the “Wacky World of Energy.” We are working out the kinks and trying to get a faster turn around, so you will have a bonus episode tomorrow, and then an episode that will be recorded the very day this podcast is coming out. That’s right! We stay busy churning out content for you! Go ahead and frac that follow button so that you stay up to date on all things energy related. We cover a lot of ground here and hope you join us for the ride as we all become better energy professionals. But enough of that. I know you didn’t come here to listen to self promo. You came to hear the biggest stories and most revealing statistics in the world of oil and gas.
Commodity prices are performing a little bit differently than we have observed in recent months. Typically we see WTI gaining strength relative to natural gas. This week is a whole different ball game. A week ago oil was just shy of $105. From there it fell to around $100, and now we are looking to consolidate around $90. Markets aren’t fans of immediate and volatile changes, and we may be seeing that with WTI cooling off from the Russian invasion. If prices are to settle here it will leave us at a floor higher than it was before the invasion, but I also believe that this is just the beginning of expensive energy. Most people know that prices are a little higher than they should be at the moment. This is why folks continue to pay down debt rather than expand production. This means that the price could settle soon, but I truly believe we are looking at much higher prices in the future. Each day it becomes clear that energy is power. Thankfully we have the ability to produce more should things get painful. But all things are in balance. While crude ain’t doing as hot, natural gas is up to $6.60 at the moment and shows signs of climbing higher. The demand for natural gas is high, and we just can’t service the shortage in Europe fast enough. Just a month ago natural gas was about $4.70. That is a 2 dollar difference in a matter of weeks. If crude oil taught us anything, we can expect natural gas to cool off soon and come down in price. Maybe not much, but it has been on an absolute tear. In short, oil doing well in the long term, and natural gas is doing well in the long term.
Next up is the rig count. I know these numbers may come as a shock as I said moments ago that people aren’t going drill crazy but are exercising restraint, but we are up 16 rigs on the week, which I believe is the biggest increase we have seen in 2022. This brings us to a total of 689, or 257 more rigs than we had this time last year. I know it sounds like a lot, but this is nothing compared to the totals of more than 1000 rigs in years past. Unsurprisingly, all of the growth is centered in the Permian where 9 new rigs went up. Otherwise the DJ-Niobrara, Eagle Ford, Haynesville, Utica, and Williston each gained one. If we say 9 rigs go up in the Barnett shale, I’d say that is something significant to note. The Permian seeing 9 new rigs is nothing out of the ordinary. This now brings the Permian to 108 more rigs than they had this time last year. Basin by basin results are almost directly mirrored state by state, so I’ll save my breath. Virtually all of the new rigs are horizontal and targeting oil. While onshore is great, the gulf lost 2 of its rigs lowering its total from 14 to 12. This report ain’t too shabby. Lots of growth in Texas, and no one had to put any rigs down, so you really can’t complain.
Lastly is the inventory report which you could have read on www.rarepetro.com. In case you missed it, I’ll get you all caught up with a rough and dirty shakedown. The EIA was getting comfortable with the trend of significant drawdowns and predicted a 2 million barrel drawdown. This would have been in line with results from recent weeks, but unfortunately, the resulting build was nearly 2.5 million barrels. While the API predicted a slightly smaller drawdown at 1.5 million barrels, they were also too optimistic. This is largely a result of the Chinese lockdowns, but even those folks are growing restless as access to food, medicine, and water proves difficult. If this is not a freak build, and the current state of events actually results in an inventory build, then the Biden administration SPR releases could make a significant difference in the short term. An extra million barrels a week will not always result in a build, but it can certainly make them more frequent. Unfortunately, this is a short-term solution and primarily serves to drain domestic inventories. Regardless, this build is nothing terrible. It still leaves us below the 5-year historical range and is actually much smaller than builds we have seen in the past. Despite these historic inventory releases around the corner, US gasoline inventories just dropped another 2 million barrels on the week. This reinforces the upwards trajectory of gasoline. If not corrected, the national average will hit $4 a gallon of regular in 8 weeks’ time. The national average is down about 7 cents on the week which is one of the biggest decreases we have seen in months. The tricky part will be continuing in a negative direction. Distillates are attempting to reach back into historically normal territory, and it just might run right into it. Propane continues to lay low, but it is not doing anything alarming. In fact, it is one of the few commodities that has been able to behave normally when compared to the past.
But that wraps up all of our statistics. So, what is going on in world events? We recorded quite a bit about the Russian situation, so you can hear about that on Wednesday. Otherwise, I think we should touch on some uplifting R&D news. Ineos is one of the largest oil and gas operators in the North Sea. They believe a future of energy independence is important for the UK and have requested a license to develop a fracking test site. The goal? Prove that the tech is safe. Now most of us are totally comfortable with hydraulic fracturing and understand what it entails. Unfortunately, the general public has been fed some nasty disinformation that leads them to believe that Satan himself invented the process. While the Russian invasion of Ukraine is a terrible situation, it has crafted an environment where this conversation could happen. Can you imagine if someone pitched this back in 2020 when oil prices had recovered to the $60 range? Boris Johnson would have laughed in their faces and told them just to buy a Tesla. Now, energy shortages are not just a boogeyman, but rather the daily state of events for folks in Europe. This crisis came just as crews were getting ready to seal valuable producing assets in the North Sea. Cuadrilla owned the assets, and the CEO said, “I would like to thank the prime minister and the business secretary for seeing the light and realizing – just in time – how absurd it would have been to force us to pour concrete down Britain’s only two viable shale gas wells in the middle of an energy crisis.” Unfortunately, they are still going about it in the same way we’ve been doing for years: by ordering a scientific review over the effects of fracking on the environment. To me this just sounds like the UK buying itself 3 months of time hoping that Russia comes to it’s senses and sells what they might consider “ethical and affordable” energy. While this story is not huge in and of itself, it highlights the fact that leaders are willing to have conversations about conventional energy. It is a beautiful start, so I am excited to see what comes of it.
Next, a little bit of confirmation bias. If you’ve listed to this podcast for a few months, you would know that RARE PETRO believes OPEC is producing at maximum capacity. Sure, 2020 production restrictions were all fine and dandy, but there are 2 big problems. The first is money. There isn’t a lot of investment going into conventional energy projects for OPEC members. While the magnitude is huge, the investment has shifted from conventional energy to green projects. Saudi Arabia has poured 100s of millions into green energy projects, but we aren’t seeing the same magnitude of investment in traditional energy, especially for many of the smaller OPEC members. The second operations. Some wells (if left offline for too long) may not come back online. There are dozens of reasons a well would not perform as well as it was prior to being shut in. Not only that, but operations are in a bit of a lull. Labor and materials are short. We need more money and material investment into conventional energy if we want to produce more as a world, but it just isn’t happening. Now, Nigeria is publicly claiming that OPEC is out of spare capacity. As Nigeria’s petroleum minister says, “If there is anything we can do to produce more, OPEC will be the first to produce more. But unfortunately, this capacity doesn’t exist in most OPEC countries.” He’s right. Outside of Saudi Arabia and the UAE, every OPEC member is producing less today than they were in 2020. If you consider this with the supply shock caused by Russia, we are looking at one of the biggest supply constraints that we have seen in decades. It might even rival the embargo of the 70s.
In short, the world is on the brink of a rather devastating energy shortage that could spiral into other parts of world markets. Energy is a feedstock for everything we do, so let’s hope we address the issues before they get out of hand. But, that is all we’ve got for you today. I know it sounds like doom and gloom ahead, but I’m sure things will be okay in the end. Keep your ears open, your nose in books, and spirit high. Head on over to www.rarepetro.com to find even more of our content covering all things energy related. Thanks again for tuning in, and until we see you next time, take care everybody!