Record reserve release, OPEC enjoying high prices, and Germany finds itself in too deep.
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Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on April 4, 2022. It is finally April which brings us to Q2 of 2022. Q1 moved quickly. If you and I were at a New Years party and I told you oil would be above $100 a barrel by April, would you have believed me? Most wouldn’t, and the Russian invasion of Ukraine certainly accelerated things, but RARE PETRO has maintained that argument for quite some time now. While the world sees expensive oil as the opportunity for the future of green energy, we believe it highlights the fundamental issues of undersupply & underinvestment in oil and gas. If energy is going to get more expensive, you had better stay in this industry as there could be bright days ahead. Might as well follow and subscribe to this podcast so that you have the advantage of knowledge to separate you from your peers. The future is bright and full of hydrocarbons, so don’t lose hope. But you didn’t come here to listen to an oil pep talk. I sound like a guy on a soapbox at some wild energy rally. We would be better off focusing on what we know: statistics, and news.
Let’s kick it off with commodity prices. Last week WTI was all over the board. It fell just below $100 only to shoot right back up to more than $108. It peaked Wednesday and fell back down to $100 by the end of the week. Right now, the price sits at $101.38. Not as sexy as $108, but it is possible that the price ceiling between $105-$110 is being tested. We are just seeing loads of resistance. The Russian invasion blew up the prices, establishing a “flagpole” on the chart of time vs price. The past couple of weeks have been pretty bouncy, but there is convergence around a price just above $100. This establishes a pennant which means it is very possible we see a breakout around April 12th. It could be the point that establishes a new price floor, or the point that it all falls in on itself. Again, any big news in Moscow could alter this timeline, but things are looking good. While WTI may have us on the edge of our seats, natural gas is stealing the show. Last week’s low was about $5.30, and has since climbed all the way to a peak of $5.85 earlier this morning. It has since cooled off and now sits at about $5.76. At this point, it is close to challenging the price highs from last October and November. The winter weather is now wrapping up since we are getting deeper into spring, so the demand for natural gas could change very quickly. At the very least, the US will be shipping lots of its gas inventory to help stabilize the shortage in Europe, so this could be an atypical spring for natural gas. Lots of opportunity in commodities right now, and an even bigger amount of risk. Speculate carefully.
Next up, the rig count. A modest increase of 3 this week brings us to a total of 673 which is 243 more rigs than we had this time last year. The Permian tacked on 4 new rigs, and both the Cana Woodford and Marcellus added 1. Otherwise, the Haynesville and Williston dropped 1. Of course this leaves Texas as the dominant state with 5 new rigs. Utah and Virginia follow up for one each. North Dakota lost one, and Louisiana lost 3. While it sounds like there are certainly more negative than positive numbers, you gotta look at the long term. Every basin and state metric is positive when compared to a year ago outside of the Marcellus basin and State of Kansas who are at no change. Things are going well for production, but it is likely not anywhere near enough to bring the world to a point of stability. The new rigs will be targeting a mix of oil and gas and drilling horizontally.
Our last statistic is the inventory report which is much better enjoyed on www.rarepetro.com. We feature a new cocktail recipe every week and really dive deep with graphs and figures. Here is what you may have missed if you didn’t get the pleasure of reading it last week. The EIA has started to understand that this is a time of drawdowns. While they predicted a 1 million barrel drawdown, it was actually much closer to 3.5 million. The API predicted a slightly larger drawdown at 1.5 million barrels but also lacked the confidence to come close to matching the 3 million barrel reported drawdown. The state of inventories in the future could change dramatically. President Biden has announced the idea of releasing 180 million barrels from the SPR (25% of total capacity) over the next six months at a rate of 1 million barrels per day. This is being done in an attempt to lower gas prices and fight inflation across the states. Goldman-Sachs has released an opinion that seems to be rather reasonable: This will be an effective way to temporarily fight inflation, but it does not address the underlying issue of supply deficit. It will be interesting to see how the rest of the world (especially OPEC) reacts to this as it is the biggest release of oil reserves to ever be recorded. Hopefully, the Biden administration will come up with a more effective solution soon. Until then, inventories are on the decline and lower than the historical 5-year range and have been in a steady state of decline for months now. Gasoline inventories are now back to historically normal territory. The recent 800,000 barrel build pushes the inventory right up against the upper boundary of what we have seen in the past 5 years. The inventories may reach a state of oversupply thanks to the Biden administration’s release of oil from the SPR. Despite the small build, gasoline prices have gone up yet again. The average will soon approach highs that the United States has not seen since 2012 if the SPR releases have no effect on the price. The national average is now $4.225, which is $0.615 higher than it was a month ago. Still, this is a price lower than yesterday by a full cent, but a cent decrease in price compared to the big dip in oil prices is non-comparable and unhelpful. Distillates still remain dramatically low. Propane is barely within its historical range. The theme here seems to be shortages, which you may have noticed throughout the entire article. A shortage of crude. A shortage of natural gas. A shortage of distillates and propane. The only thing we don’t seem to have a shortage of is gasoline, but the price is through the roof so that is no help at all. We’ve got a critical problem to address. The United States is home to beautiful and magnificent energy resources, but the “green transition” has blinded us to their movement. If we don’t correct our course soon, we will long for the days of “cheap” $4 gas and $120 barrels of oil.
But that grim future is not yet here, so we may as well fill the rest of our discussion with current events. A big story from last week came out of an OPEC meeting. As you may know, OPEC has been changing production goals throughout the tragedy of 2020. Right now, the organization is in over compliance with production cuts which essentially means too many members are unable to produce at the level agreed. This only reinforces global energy shortages. In recent years, they have worked in tandem with agencies like the IEA to analyze data and adjust production cuts. The IEA has been pushing OPEC towards big production increases, but much like the rest of the industry, they seemed to have learned from the past. Rather than running wild with rampant production, they said they would also be including Wood Mackenzie and Rystad in the conversation moving forward. This way they get several opinions in order to make their decisions and are less closely influenced by the IEA. This is very similar to the way we look at EIA and API data for the inventory report. The difference for OPEC is that they don’t want a third opinion. They really just want to shrug off the idea of aggressive oil output and justify it by claiming to evaluate a mix of sources. If the IEA had its way, the entire world would be pushing to develop natural gas infrastructure for the distant future, and much more oil for the immediate future. While that is beneficial to world consumers, it is not in OPEC’s best interest to drop commodity prices. Remember that most of these countries in OPEC have nationalized oil companies that rake in government money. It would be stupid to provide the world with cheap energy at the risk of lowering their own income. I know that sounds like it goes along with the big bad evil oil man narrative that the West seems to be infatuated with, but you have to look at things for what they are, and what they aren’t. OPEC is in the business of making money for its cartel members… not liberating the world with cheap and abundant energy. This is why they have been ignoring calls from the rest of the world to increase production, or as the headlines plead “turn on the taps.”
For our next story, we will be watching someone else look down the barrel of a recession. People initially cried out against Russia and claimed they would stop importing Russian energy. Small baltic states have achieved this, and others are still weaning off Russia oil as exports drop as much as 20% in a matter of days. Still, some people are tied a little too closely to Russian energy and can’t quite quit even if they wanted to. For example, Christian Sewing is the Chief Executive of Deutsche Bank and he says, “The situation would be even worse if imports or supplies of Russian oil and natural gas were to be halted. A significant recession in Germany would then be virtually unavoidable.” That is the simple truth of this matter. If you aren’t able to develop energy independence you become that much more dependent on someone who is. The only reason Russia hasn’t been absolutely demolished by actions from international organizations is because a decent chunk of this world is running on Russian energy. Moscow was able to get its tendrils into much of Europe through the form of energy infrastructure. Why not build a second pipeline to Germany. Why not annex more of the Baltic states to better cement your position as the most dominant seller and control even more of energy distribution? Russia knew what it was doing, and they have done it in the past. Russian energy companies have been fined tons of money in cases they were accused of slowing deliveries for malicious reasons.
But ladies and gentlemen, that is the last of the episode. You can always find more content on www.rarepetro.com where we have loads and loads of content for you to enjoy. There is always something new to learn and we think this is a great way for you to do it. If you find we don’t have information that you are looking for, shoot us a quick message email@example.com so that we may address it in a future episode. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!