Tumbling commodities, growing trends of resource nationalization, and Germany’s decision to embrace emissions.
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Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on the first of August, 2022. Now just so you folks know, RARE PETRO has some big things in the works so I will likely be traveling for the next three months. Those of you who are long time listeners may remember when this happened about this time last year. I was away for a little more than 5 months, but the content kept flowing! Since then we have really doubled down to make sure we get more content out to you every week day. I can’t promise we will be hitting everything as hard as we were before, but we have a great team here so I don’t anticipate it being a problem. Hell, you might even be hearing more from our intern, Nick! However it shakes out, know that we will still be putting out some of the best energy related content on the internet. But you didn’t come here to listen to me wail about the inconsistencies of a traveling engineer. You came to hear all about the biggest stories and read between the data lines. Let’s do it!
It is a wild morning for commodity prices. Timing is key here. We know Monday is volatile, but a new month can introduce a bit of uncertainty as well. The big thing to note is that people are looking towards decreased activity in China. Chineses factory activity contracted meaning that there will be some questions around demand. Will it decrease? Can things get worse if this new COVID strain causes China to shut down? These are the questions in the front of trader’s minds, and it seems that they share a bearish sentiment. WTI down 5% to $94.70. Brent down 4% to a flat one hundo. Natural gas down 2 and a quarter percent to about $8. It is a red Monday for commodities, while other markets have been performing a little bit better. Still, we got a little bit of news coming out later this week, so these prices aren’t guaranteed to fall lower. OPEC will be meeting on August 3 to discuss future plans now that all 2020 cuts are rolled back. While it holds potential as a meeting where new ground is broken on production increases, I’m really skeptical anything will come out. All those fellas are struggling in their own regard, so any significant supply changes would truly surprise me. Overall, not the best Monday Morning for commodity prices.
Next is the rig count. Fortunately we’ve got some good news here as the count went up 9 to a total of 767. This is 279 more rigs than we had this time last year. Basin by basin the Arkoma Woodford, Eagle Ford, and Permian are all up 2 rigs each. The Haynesville was even able to add one to its total. Surprisingly, the Cana Woodford lost 5 rigs lowering its total from 29 to 25. Ouch. State by state we don’t see a ton of change. A few here and there with Texas being up the most at 6 more rigs. West Virginia was the only loser who happened to be down 2 rigs. These new rigs will be targeting oil and virtually all of them will be horizontal. Other than that, we see one more rig in the gulf. We can always count on our good buddy the rig count to lift our mood.
Our last statistic to cover regards domestic inventories. You can always find our weekly “Thirsty Thursday” report paired with a fun drink recipe on our website. Here’s the barebones info if you missed the last one. The EIA expected a decent drawdown of 1 million barrels, though that would just be a dent in recent builds. According to their reported data, the actual drawdown was about 4.5 million barrels. The API made a slightly larger prediction but reported slightly smaller results. Still, the drawdown was significant at more than 4 million barrels. This drawdown comes at a time when it looked like builds would become the norm. It is relieving that builds can still be this big. While this is a drawdown, it doesn’t do much to bring domestic inventories below their historic 5-year range… for now. New record lows could be in the cards as the root issue of the energy crisis has not been addressed, and eventually the US will stop releasing 1 million bpd from the SPR. While some folks are recognizing lower gas prices, that may not be the case for long. Last week’s gasoline build of 3.5 million barrels is almost entirely erased by this week’s 3.3 million barrel draw. At this point it looks like we are doomed to stay outside of the historical range. The next few months have traditionally been a time period where drawdowns become more frequent, so this may leave us paying a ton at the pump this winter. Until then, we recommend you enjoy the (comparatively) low gas prices as the national average slows around $4 per gallon of regular. Texas holds the record for the cheapest gallon with a state average of $3.761. Californians rejoice as their average gallon comes closer and closer to $5.500. Whichever way you cut it, fuel is cheaper all across the country and “price gouging at the pump” is no longer a popular narrative. The gap between current distillate stocks and historic inventories has started to widen, though no short-term trend is clear. The long term suggests that we are in a period of decline starting from January of 2021. This is a time when one would expect a series of builds. Propane, however, is looking to come back into its predictable and tight historical range like the well-behaved commodity that it is.
Folks, I believe that wraps up the statistical portion of the podcast. Now its high time we look through some current events. As the green transition becomes more and more aggressive, a growing number of countries are securing their mineral resources. We have talked about it in the context of Mexico, though you may be surprised to hear Kyrgyzstan is taking matters into its own hands. It all started back in May of 2021 when authorities seized the Kumtor gold mine that Canada had been developing for decades. A bold move for a country that receives 20% of governmental revenues from the mining sector. From there the government continued to introduce policies that favored state operations and made it exceedingly difficult for private companies to compete. Things like non-compete agreements, huge license renewal fees for non-state companies, and tenfold increase in water fees where (you guessed it) state companies were exempt. The government maintains that it performed an audit and found many private companies buy as many licenses for operation that they can for 5 to 10 year periods only to turn around and sell them. Whether or not that is true, these countries reserve the right to control what goes on within their own borders. You could look at an official in a funny way and they just might boot you out. Perhaps it is not in the best interest of the country in question to do so, but either way they can still kick you out. I imagine we will be seeing more stories like this as developing and developed nations realize they can profit from the sector without other countries coming in under the guise of being helpful. While many Kyrgyz people within the government are criticizing the actions, no one can be quite sure what will happen. For now, it looks like as many as 90% of license holders may relinquish their claims to mining licenses. Keep an eye out, because the current resource scarcity is causing more folks to choose theirs over yours.
Next, a quick look at one of the strongest economies in Europe. Germany had restarted their coal power plants as they have access to lots of lignite. Now, they are restarting another two power plants running on oil in an effort to conserve natural gas before winter. Don’t worry though… Germany is taking other measures to ensure that gas power is available through winter, like reducing the temperature of indoor and outdoor swimming pools and closing saunas or turning off the spotlights pointed at historical monuments or municipal buildings. To make matters worse, the original plan to shut down 3 nuclear plants in light of the Fukushima is set to execute by the end of this year, though officials have only toyed with the idea of reversing the plan. The Greens are part of the coalition government and are firmly opposed to extending nuclear power generation through 2022, though they may change their song by the time February arrives. I worry that this winter could get to be very bad for many people and it is all up to Russia to decide how it wants to play this game. While I do they will limit gas flows, I doubt they will fully terminate them. At this point it seems that they are prepared to respond to the G7 price cap. Russia refused to acknowledge the price cap and would not sell to anyone enforcing it, though they said they would be open to selling energy supplies to others who also refused the price cap. At that point governments will either be prioritizing support for Ukraine, or the wellness of their people and the worst part of all is that those two options seem to be mutually exclusive. Makes you thankful to live in a country with such a wealth of energy resources whether or not we have the administration that wants to produce them.
I know we visit a lot of the same topics week after week, but it is important to get the whole story and see these things evolve on a timeline. Back in 2020 we talked a lot about COVID, and now we talk a lot about Russia. I can’t be sure of what we will be talking about in 2023, though I think it will have to do with an energy shortage and struggling economies. Energy ties into all of these conversations, and it is important to see how so in order to become the best energy professionals that we can be. If you want to continue taking advantage of this free resource, go ahead and frac that follow button and follow us on LinkedIn to stay plugged into all things energy. This has been Tavis Kilian with RARE PETRO and until we see you next time, take care everybody!