Relaxing commodity prices, foolish protests, and Russia knowing that it has the gold.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you a new episode of Monday Madness on April 25, 2022. I tell you what, I was stoked for the warm weather that I was SURE would be here after last Friday: a warm, sunny, and beautiful day. Unfortunately the weekend slapped us with cold wind and even hail last night. Only dippin’ dots sized so nothing terrible. But, when life gives you lemons, you go up to Berthoud Pass to run a few laps on the ole snowboard. But you didn’t come here to listen to me boast about what an incredible athlete I am, you came to hear about all the biggest news in the world of energy.
Of course we start with commodity prices. Last week WTI sat around $102.50 after opening up at nearly $110. This week’s story is much more different as WTI opened just above $100, but has already fallen to $96.31. I think the hype of the Russian invasion of Ukraine has worn off, and the EU has failed to take a serious stance on the issue resulting in a price ceiling of around $100. I do think that is undervalued, but until more of the western world begins to struggle with energy prices, I don’t think we will see much change in that price. Natural gas had its time in the limelight last week as it reached almost $8. Then it fell to $7.50, then $7, and now we sit at about $6.65. I think the situation here is similar to that of WTI. A huge run up followed by a confused fall that isn’t quite sure of the new price floor. I truly believe these are undervalued given the data we’ve covered between domestic inventories and DUCs, but we likely won’t see that correction for quite some time. Either way, it is hard to be upset given that commodity prices are great right now and stimulating activity within the industry. So, suboptimal, but still great.
Next up is the rig count. According to the most recent data, the US rig count is up 2 rigs to a total of 695 which is 257 more rigs than we had this time last year. Things are pretty quiet basin by basin, so we will just skip straight into the state breakdowns. North Dakota is leading the pack with 2 new rigs. Alaska found a way to incorporate 1 more rig bringing its total to 9. The only state to have their count fall was Wyoming who lost a single rig. This is one of those weeks that might as well be no change. A solid 682 rigs with little change in drilling activity. It is certainly better than losing rigs. While most of us are familiar with offshore rigs, you may not be familiar with inland water rigs. These are rigs that operate in areas classified as marshes or just large bodies of water that are either brackish or deeper into some states. There was 1 running, but as of the most recent report that total has fallen to zero. Nothing crazy, just something to note of since I cannot recall ever seeing an inland water rig. If you have, please go ahead and send us a picture to podcast@rarepetro.com and we may just be able to credit you and feature it on our LinkedIn page.
Lastly is the inventory report which is always better enjoyed on www.rarepetro.com. If you missed it, you missed out on a nice coffee cocktail and some stellar data. Here’s the barebones. If you remember last week’s data you would know that we saw an absolutely insane build of somewhere between 7-9 million barrels. This week’s results are wildly different. The EIA was expecting a reasonably sized build, but instead reported an 8 million barrel drawdown. The API expected a similarly small build but instead was witness to a 4.5 million barrel drawdown. While not grouped nearly as tight as last week, it is good to see the EIA and API agree that it was indeed a drawdown. Still, it is strange to see another draw despite another 100,000 bbls per day of domestic production and another SPR release. In fact, the SPR is now at its lowest level since May of 2002. Let’s hope that nobody chooses to wage war with the US because this would be prime. We had better figure out our domestic energy policy sooner rather than later because this situation could become much worse very quickly. While this balances out last week’s build, it certainly doesn’t bode well for the future. We are seeing a flip flop between builds and draws, but the magnitude of builds is growing while the magnitude of draws remains about unchanged (up until this week at least). We still remain lower than the 5-year historical crude range despite these growing builds. If anything, the trendline is close to leveling out. Gasoline inventories have yet again dropped. This time it is a small 800,000 bbl drawdown, but a drawdown nonetheless. Should inventories not level out ore build in the coming month, we may have a big problem on our hands. As you might have predicted, the draw in gasoline inventories has increased the price of fuel. The national average for a gallon of regular gasoline increased by 4.6 cents on the week. Distillates took an absolute nosedive reinforcing the fact that we are doing a poor job at addressing tightening commodity reserves. Propane on the other hand was fine and stuck to its historical range.
But that is all we have for statistics. Now it is time to get into some news! The first story is a bit whimsical, but something I wanted to call attention to. Early this morning, a Hong Kong registered ship that is leased by Russian oil company Novatek pulled into a Norwegian port just south of the capital. As you may have guessed, it was full of Russian oil. Greenpeace members donned their best petroleum based boats and cold weather gear to chain themselves to the ship’s anchor. Greenpeace claims that receiving this cargo is wrong as Norway would be financing Russia’s warfare. Exxon subsidiary Esso was going to receive the shipment at its terminal until these hooligans showed up. Anne Fougner, a spokewoman for Esso told a local newspaper that the oil had, in fact, been purchased prior to the invasion of Ukraine and that Esso Norway, “does not have other contracts for the purchase of products from Russia.” This is just how commodities work folks. The futures contracts take a little bit to work out, and take some time to deliver given the vast volume being moved and the amount of infrastructure available to deliver it. While several other activists were stopped by police, I’m glad that a handful of folks representing Greenpeace were able to make a spectacle of themselves. If anything, they are delaying the development of necessary hydrocarbons that will go to servicing the European energy crisis, a near treasonous act in and of itself. While people’s hearts are in the right place, I’m confident that you, yes the one listening to this podcast, will be able to educate folks about conventional energy. Your opposition is a bunch of nitwits that chain themselves to a boat delivering oil from a contract conceived 2-3 months ago. Folks just aren’t aware of the intricacies and it is our job to try and educate them on why we need hydrocarbons, and just how useful they are.
In more impactful news, we have secret talks between the US and EU officials as they try to come up with a method that stops Russian crude imports. Sources have claimed that they are considering a payment mechanism that holds back revenue, banning Russian oil and gas altogether, or a price cap. The biggest hurdle they face right now is a damned if you do, damned if you don’t situation. Let’s say the world bans Russian oil. Immediately commodity prices would go up. Those who ignore the ban like China and India have so far would still buy Russian oil that is now more expensive than it was before which still provides Russia with much needed revenue. My problem with this whole situation lies in a basic rule that an evil landlord once shared with me: “He who has the gold, makes the rules.” In this day and age, energy is the gold of the modern society. Not the movement of energy as electricity, but the raw energetic power that hydrocarbons afford you. Russia has loads of this metaphoric gold. The rest of Europe does not. These solutions are a lot like going to your local farmer and saying, “The community has agreed that your wheat is unethical. We will only buy it at a price of $1 per bushel, and will not budge on this until you comply.” What is the more realistic outcome of that situation? The farmer buckling under pressure selling his wheat at a price that cuts even or loses him money, or the farmer waiting until the town gets hungry enough to buy his grain? We aren’t talking about cars, furniture, or knick-knacks here… we are talking about the hydrocarbons that allow society to thrive and move forward. The EU and US really hold no power over Russia in negotiations of what we end up paying for energy, and that is why Russia is succeeding with this invasion. Everybody needs the energy that they deliver. Russia has the gold and is very easily making the rules.
Ladies and gentlemen we have run out of time. Monday Madness hits things quick, and hard. If your are looking for longform discussion and speculation surrounding current events, I highly recommend you check out our newest segment, the Wacky World of Energy! Anthony and myself have a little more fun on those episodes and explore some hypotheses regarding the energy industry and geopolitics. That comes out every Wednesday, so be on the lookout! Other than that you can always follow us on LinkedIn or go to www.rarepetro.com to find dozens of hours of content and research. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!