Saudi and Russia are looking to saddle up with China, Iran joins in on the labor strikes, and Credit Suisse is starting to sweat.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on April 25, 2023. Another surprise snow for Colorado over the weekend, but the good news is that it lasted about as long as a mild hangover as it disappeared by noon once the sun was high in the sky. Already about finished with April meaning we are almost ⅓ of the way through this year with nothing but $80 oil prices, and sometimes less. Still, I’m getting ahead of myself. If you are new to the Monday Madness segment, we will take a bit of time to explore some statistics revolving around commodity price, the rig count, and domestic inventories. Then we will explore some of the most interesting stories that have popped up in recent headlines. Normally it is released on Monday, but I was out sick yesterday, so here we are! Welcome to the show, and let’s get to it!
I already alluded to it but commodity prices just kind of suck. Last week we saw an $81 barrel for a few hours before it settled to $77 by the end of the week. We opened up on Monday only as high as $77 before we collapsed down to almost $76. It seems as if whatever efforts China and Saudi Arabia are taking to work against American energy are working, but I don’t know how. Everything has been going up in price. Some eggs are hitting $6 a dozen. Housing and rent prices have skyrocketed. Even gasoline is only cheaper compared to a year ago. Someone you can consider all of this, but the energy commodities like crude and natural gas that feed into all of this (especially gasoline). Again, there is something else at play here that I haven’t quite pinned yet, but I can tell you it is not market fundamentals. As I alluded a second ago, natural gas is also in the toilet as it hovers between $2.20 and $2.30. We’ve seen as high as $2.50 for natural gas this year, though I hesitate to use the adjective “high.” Brent is closely tracking WTI and the spread continues to hover between $3.50 – $4.00. Nothing exceptionally crazy going on here, so stay patient for some more news in this arena next week.
Next up is the rig count. This is admittedly a much quieter week than weeks of recent history. The Permian added 2 rigs, the Mississippian lost one, and the Cana Woodford also lost one. State by state we have a little more action. Texas and Utah are the heavy hitters with 2 new rigs each. Colorado, New Mexico, and Oklahoma each added 1. Que up a tiny fiddle for both Kansas and Wyoming as they each lost a rig. No change in the offshore environment. It seems there is a slight emphasis on horizontal wells with a pretty even split between oil and gas wells. Not an exciting week for any our statistics I know, but we only have one more to get through!
Here is Nick Fernhout’s weekly “Thirsty Thursday” report. We may not have him writing them for much longer with an internship coming up, so get it while it lasts! If you missed last week’s edition, here are the barebones. Perhaps it’s everywhere besides Colorado that is getting good weather because the draw in crude inventories is indicative of high demand driven by people getting outside, driving their cars, and contributing to the economy. This week there was a 4.6 million barrel draw against the EIA’s forecast of just about 1 million barrels. The API forecasted a much larger draw of 2.5 million barrels and reported a significantly lower value of 2.675 million barrels. It’s odd that their numbers differed from the EIA’s so much this week but as mentioned in a previous report the EIA is typically trusted over the API. Inventories of crude oil have been in decline for over a month now. Looking ahead and trying to predict whether we will see more draws or builds is difficult. On one hand, you have increased summer travel spurring demand and inventory draws, on the other hand, some of the world’s largest economies are leaving room for uncertainty when it comes to future demand. China in particular is where many people have their attention focused. On the fuels market side of things, prices and stocks are up. As refiners come back online they can pump out more gasoline. The increase in gasoline stocks drives the price down. Wait… but why is gas more expensive and getting increasingly more so? Honestly, I’m not too sure myself. It likely has something to do with some lag between inventories and prices as well as the temporary jump in oil prices. I’d expect gas prices to cool off in the coming weeks. The price of a gallon of gas has increased by 7 to 10 cents per week for nearly a month, and this week’s increase of 10 cents is no different. For reference, a year ago today, the cost of gasoline was $4.066, so while it may seem expensive now, we aren’t nearing those extremes felt last year. In the world of diesel and distillates, inventories are waning. A month or so after climbing back into the 5-year range, inventories are on their way to exceeding the lowest level seen during that range. Although counter-intuitive, diesel cheapened this week by an insignificant $0.009, and that concludes the report. Thanks again to Nick Fernhout for putting those together.
Our first story is more of a snippet but it is absolutely packed to the brim of between the lines content. Last Friday President Putin discussed the OPEC+ production agreements with Saudi Crown Prince Mohammed bin Salman, in a telephone. According to a readout from Putin they both expressed satisfaction with the level of cooperation between their countries to bring what they called “stability” to global oil markets. In a quote from Putin himself, “The conversation proceeded in a friendly manner, was constructive and informative. With this in mind, it was agreed to build up contacts in specific areas of cooperation.” So what does that mean? Well, consider that Saudi Arabia is essentially the crown jewel for OPEC. OPEC is responsible for roughly 30% of daily global production. Russia is responsible for about 10%. China accounts for another 5%. If they can all become friends and coordinate their work, roughly 50% of the global oil trade could be drastically affected by the drop of the hat. If they, say, all agreed to stop purchasing American oil, the price of a barrel of WTI could be dramatically decreased due to plummeting demand. If they took it further and decided to stop trading for oil using the petrodollar system, only worse things would happen to the American economy. This could turn into something much larger and more serious, so please keep those eyes peeled in the coming weeks.
Next up, more strikes! We’ve talked about strikes in France and the UK, but it has since expanded past Europe to the Middle East. The latest labor strike has finally affected the energy sector in Iran. While the energy industry is just one of the participating members, they are specifically calling for a 79% wage increase for contract workers in both industrial and nonindustrial factors. This was a counteroffer to the government who came through with a deal that would reward them with almost 3 times as less. People are primarily angry because a small wage increase does not do well to offset the 40% inflation the country has experienced in the past 2 years. Again, inflation is steadily growing all over the world and outpacing wages, yet energy somehow continues to get even cheaper. This is only the latest headache for the Iranian government as there are still many folks protesting the death of Mahsa Amini due to her failure to properly wear her headscarf. Political unrest may be the theme for 2023, but you had best believe the Iranian people showed up to the party early.
Real quick before we close out I’ve got a little statistic that should paint a good picture of the current economic landscape. In the first quarter Credit Suisse, a massive investment bank, reported their clients had withdrawn $69 billion worth of assets in the first quarter. This correlated to a 9% loss of assets in the wealth management unit. The entire bank ended up losing a total of $1.46 billion across all of its units. A major reason for the massive outflux of money stems from the UBS and government backed bailout/takeover of the bank last month which carried significant integration risks. Turns out when the government decides to to forcibly intervene, it scares off a lot of money. I would keep an eye out for any news for Q2 later in the year, but I almost want to say that I expect H2 of 2023 to get especially hairy.
But ladies and gentlemen, that is all I have. Again I apologize for the late episode. You boy ate something a little wonky and the old gut didn’t want to comply, but I figured it is better to get this news to you late rather than never. Be sure to frac that follow button because we have a brand new episode of the Basin Breakdown coming out tomorrow, the 26th and as usual, Scott and I had some fun recounting big news in the American oil patch. Otherwise this has been Tavis Kilian with RARE PETRO. Until we see you next time, take care everybody!