In this episode we focus heavily on the Petrodollar; a brief history and how it is being challenged.
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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 3, 2023. That’s right, it is finally Q2 and closer to spring! I start out writing this script from a nearby coffee shop as I work to switch things up a bit. You know, making changes in the routine as I observe change in the seasons. It looks like everyone else is doing the same thing! Plenty of dogs out for walks, people strolling the sidewalks, and even birds back with the warm weather. Unfortunately I hear that all of this change will be thwarted soon as there are rumors of snow in Denver on the 4th. You know what they say, get while the getting is good, and the place you should be getting is into that sunlight! But you didn’t come here to listen to an engineer harp on the importance of vitamin D, that just isn’t in my wheelhouse. This is, in fact, the RARE PETRO podcast where we talk about energy, and I think it is high time we get into that.
First things first, commodity prices. Believe it or not, we are back to $80 oil. It has been exactly a month since we last saw that price point. This time last week the price was only about $72.88. From there it snaked between 72 and 74 dollars up until about Friday. Late Friday the price was able to climb to the better side of $75, and I was stoked. Much to my surprise, I checked this morning and the price was on the topside of $80. That’s right, a $5 jump over the weekend from market close to market open. So how does this compare to the Brent benchmark? Well, Brent moved the same direction and spiked up but the spread shrank pretty dramatically. Before I get into any conspiracy theories, know that volatility plays rather heavily into a lot of this unique price action. When things move so hard, they are bound to be a little unstable and require some time to achieve equilibrium. It’s kind of like trying to measure the water level in a pool if you just dropped a dump truck load of water into it. You need time for the waves to settle and for the true level to make itself clear. That being said, a lot of this massive change in price action is a result of some truly once-in-a-lifetime activity. I know that phrase got tossed around a lot in the past 3 years along with the word “unprecedented,” but I am pretty particular with the words I chose. We have a lot of countries that trade millions of barrels weekly who are now starting to pick sides and settle contracts outside of the dollar. We will talk more on this later, but the important thing for you to know is that oil has been traded on the dollar virtually forever and this is a big change to the status quo. But back to the statistics before I get too carried away. Some people are already predicting a pretty bearish falloff for oil. Most of it comes down to fundamentals and benchmarks, but last week folks were expecting prices to spike to $80 before falling off to prices between 40 and 60 dollars. The first part of that prediction has since materialized, so let’s keep our fingers crossed and hope that the barrel can maintain strength through the week. Natural gas has witnessed the crazy volatility on the side of the more liquid commodities and decided to do… nothing. This time last week the Henry Hub price was about $2.10. Right now the price is about $2.10. Again, I think the biggest difference between this and natural gas is that barrels are being traded on the dollar, though mcf & btus have not stirred up headlines as much. Will natural gas go up in price? Fundamentals would seem to suggest so, but I can’t be certain. This guy has pretty much defied all expectations this year, so I suppose the best thing we can do is observe so that we can better predict it in the future.
Next up is the rig count. No big changes as we continue to oscillate between 740 and 760 rigs. The most recent change was a drop of 3 rigs, bringing us to a total of 755, or 82 more rigs than we had this time last year. Across all basins we see one lost rig from the Cana Woodford, Haynesville, Mississippian, & Permian each. Otherwise no other change. State by state is a bit more exciting with 4 more rigs in Texas and a new rig in Kansas surprisingly enough. Other than that we lost one rig in Colorado and Louisiana each, 2 in Oklahoma, and 4 in Mexico. In recent weeks we saw more emphasis on the New Mexico side of the Permian but it seems it is shifting back towards Texas. There are other finer details to comb over, but in order to save a little time for our stories, I’m gonna keep it moving along.
Our last statistic to visit is the state of domestic inventories. Nick is back from spring break and put together an excellent report last week. If you didn’t catch it, I encourage you to fast forward through this segment and read it yourself on www.rarepetro.com where he has included some wildly helpful visuals that truly emphasize your understanding of current trends. Enough of my gushing. Here is what Nick had to write: Although the streak has already been broken, it’s still refreshing to see another draw and a large one at that! 7.5 million barrels. The EIA obviously didn’t expect it considering they forecasted a build of about 100 thousand barrels. The API also didn’t expect a draw, nor such a large one at that. They did, however, report a smaller draw of right around 6 million barrels. According to various reports, refineries are back online, meaning refining capacity is back up. A jump in refining capacity is the most likely cause for the draw this week. Not only was there an oil inventory draw, but a gasoline stock draw too. Summer demand is picking up again and gas prices are holding steady in the face of increased supply despite strong demand. More specifically, gas is on average exactly 5 cents more expensive this week with the most expensive gasoline in, you guessed it, California. The cheapest gasoline is in none-other-than Mississippi. Diesel cheapened this week by 3.4 cents, nothing to celebrate but is hopefully a sign of cheaper gas in the long term. Due to the sporadic and distant updates on import/export data, this section of the report will only be updated when the EIA updates its information too, and it looks like the EIA has refreshed its data so here is the second installment of the “Crude Oil Imports/Exports” section. As of the week ending the 24th, crude oil imports have hit their lowest in a month by nearly a thousand barrels of oil per day. Crude oil exports are also down this week, sitting at 4.5 million bpd. Data on where exports are going and where imports are coming from hasn’t been updated since December so here is that information. It looks like most of the exports in December came from Canada, no surprise there, and most went to Mexico.
Thanks again to Nick for another great report. Now we move onto our news section. Normally I hit two or three big stories in this section, but today I really want to focus on a topic that has been near and dear to the RARE PETRO organization: the petrodollar. For years we have been talking about how many countries would love to challenge the status of the dollar. As I’m sure you know, the oil industry has strong roots in the United States. Ever since Sir Edwin Drake and Uncle Billy worked to drill one of the first productive oil wells in Pennsylvania it has continued to be a wildly profitable business for generations. Because of our strong understanding, the United States helped many other countries excel at developing their hydrocarbon resource. The most important place they did so was Saudi Arabia. Eventually the saudis desired to produce independently, and in 1973 the petrodollar system was created between our two countries. The US and Saudi Arabia agreed to price and trade oil in US dollars. This means that any surrounding country purchasing oil from Saudi Arabia would do so in dollars, and obviously the same held true for the US. Now that is a very high level introduction, but that is the basic idea. Through the inception of OPEC and growth of energy security worldwide, oil would be traded in dollars. This was great for the US because it created an absolutely insane demand for the US dollar worldwide. All in all, it helped us preserve the dollar as the world reserve currency, though now the story begins to change. Last month we saw a few events that are rather shocking to the established system we just discussed. On March 8, Reuters reported that multiple trading and banking sources had disclosed that Indian customers were paying for the massive amount of Russian oil they were importing in the dirham of the United Arab Emirates and the ruble of Russia, but not the US dollar. On March 28, Brazil and China announced an agreement to make all (big emphasis on all) future trade transactions in their own currencies. On the same day, TotalEnergies of France announced it had completed its first purchase of Chinese LNG using the Yuan. On the 29th, Saudi Arabia announced it had agreed to become a dialogue partner in the Shanghai Cooperation Organization which was designed to compete with similar Western organizations. This popped up just after the Saudis had agreed to once again establish diplomatic relations with Iran as China helped as the middleman to make sure everyone played nice.
All of this news has a common thread: folks are tired of listening to the US. They are tired of the US using trade sanctions as a tool. They are tired of the US sitting fat and large on the exorbitant privilege of owning the world reserve currency while complaining about things that seem trivial to everyone else watching. China is promising a dream of truly unrestricted trade. The BRICS nations are excited to create new trade agreements. Would you like to join all of us, or sit with the US and West Europe? Hell, we can’t even say west Europe at this point. France starting to trade in Yuan is huge. If France begins to do business like this, what is to stop Germany from doing the same thing? At this point there is a serious threat of a new world order, a new cool kids table, and the US is not involved.
So what does all of this mean? Is the US doomed? Are the BRICS nations coming to invade the US and enslave all peoples? Probably not, so don’t let it scare you. What is likely to happen is that the value of the dollar will crater, and we could see a very difficult period of economic decline. Maybe it’s easier than 2008, or maybe it’s harder. No one can truly be sure. It will likely be a period of great social change and reevaluation of what is truly important to American culture. A time of getting back to manufacturing things ourselves and rediscovering independence in industries we have long since offshored. Things may be difficult, but there will always be opportunities present. The best thing you can do is be prepared to take advantage of those opportunities by continuing to expose yourself to all aspects of knowledge. Energy will always be important and required, so tuning into this podcast regularly is a great way to start. We won’t sell you fear. In fact we won’t sell you much of anything at all. We will do our best to continue to provide you with objective and enriching news, data analysis, and conversation that will be sure to introduce you to new perspectives and ideas. All you have to do is frac that follow button so you don’t miss a morsel of this valuable information we are dishing out for free. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!