Join your host Tavis Kilian as he talks about the implications of Ida, the “GOLDEN CROSS”, and an update to the retroactive biofuel mandate.
Alrighty everyone, welcome back! This is the last episode of Monday Madness for the month of August 2021. This is Tavis Kilian with RARE PETRO on Monday Aug 30, 2021. Lot’s of things going on each and every day, but it would be amiss if I did not talk about Hurricane Ida. The storm of historic proportions is tearing through much of the South, especially Louisiana. Plenty of folks have already lost power and sustained hefty property damage, so look out to see how you can aid those who may have been affected. Severe weather like this is never fun and leaves plenty of work to deal with long after it is gone. If you are not affected by the storm, be a little extra thankful and kind today. But I know you didn’t come here for excellent life advice from yours truly, but for news surrounding your beloved industry of energy, so let’s get into it.
WTI prices left a lot to be desired throughout the last month, but last week showed that being patient and letting futures do their thing is truly one of the best bets. The week started out at 65 and a half bucks and found a way to climb all the way back up to about $69 by the end of Friday. This morning, Monday, WTI opened at around $67 and is already up to $69 dollars at the time of writing this podcast. Hitting the $70 price point was big, and it seems like we might be back very soon (knock on wood). Still, those of you who have listened to this podcast for a while know that there are dozens of factors pushing in opposing directions, so we will do our best to explain why prices are doing what they do as we get through the rest of the statistics and news stories during this podcast.
Now it’s time we take a little peek at the rig count. International and neighboring countries reported significant decreases, but the reliable ole US of A reported an increase of 5 rigs bringing us to a total of 508 which is a perfect doubling of the 254 rigs that existed this time a year ago. The Permian basin was the most successful adding 2 rigs with the Granite Wash, Cana Woodford, and Ardmore Woodford basins following close behind at 1 each. No major basins reported a loss. State by state is about what you would expect based on basins as Wyoming added 2 rigs and Texas, New Mexico, and Oklahoma added 1. The emphasis lies in horizontal oil wells which means most everything is behaving in the ways you would expect, which at this point can come off as a little shocking. All the new rigs were built on the mainland as the offshore sector is currently taking a beating for predictable reasons, but more on that once we get into the stories.
The last statistic to visit is the state of the inventories, which of course you can have a whole lot of fun reading on our website as the “Thirsty Thursday” news pulse. In case you didn’t read it, here’s what you missed: the EIA has settled back into estimates that we have come to expect. They predicted a 2.7 million barrel drawdown but reported an actual 3 million barrel drawdown. The API made a more conservative estimate of a 2.4 million barrel drawdown, and thank goodness we aren’t playing by the “Price is Right” rules because the actual total was much lower *price is right trombone* at a 1.2 million barrel drawdown, but a drawdown nonetheless. In the past couple of weeks, we saw some undesirable activity. A few builds of decent size, or drawdowns that may as well have been zero. Still, if we expand that back to look at the past calendar year it is easy to see that we have seen more draws than builds in that time. Commodities are likely to get much more expensive very soon thanks to a new factor on the table. American troops were attacked in Afghanistan leaving a dozen dead. Historically, conflicts like this tend to be escalated leading to higher commodity prices. Gasoline inventories are now trending even lower as the EIA’s most recent estimate shows that inventories have declined another 2.3 million barrels. While the inventory levels should be decreasing at this time during the year, this is still a historical low compared to the past 5 years. Fuel consumption should hold steady until November, so these next few months may get particularly expensive Either way, the one thing you can count on is the shortage of truck drivers. Some gas stations continue to struggle to receive gasoline leaving pocket shortages across the country. Despite all of these factors providing upward pressure, gasoline prices actually dropped about 3 cents per gallon since last week. Distillates have gone seemingly sideways for a few months now, and propane hugs the bottom of its 5-year historical range without actually setting new lows. If this holds through the fall and winter, it could cause propane to get extra expensive, especially with small businesses continuing to use outdoor space to make up for lost capacity due to reinforced COVID concerns.
But that about wraps up all of the statistics that we like to visit, and it is about time we look at current events warping them. Of course, Hurricane Ida is wreaking havoc, and that is having an effect on the energy sector. As I mentioned, the offshore sector is getting hammered as more than 95% of the Gulf’s oil production is shut-in. This is standard practice for hurricanes as the Bureau of Safety and Environmental Enforcement usually decides to recommend this action to limit the amount of needless casualties and platform damage. Because of the evacuations, we are now producing 1.74 million barrels less. Remember colonial pipeline and their infamous hack from earlier this year? They too are again shutting down infrastructure as two pipelines between Houston, Texas, and Greensboro will no longer be transporting hydrocarbons as a precautionary measure. While damage is significant, everyone’s eyes are on the refineries in New Orleans. If the storm is strong enough it may interrupt fuel and petrochemical production leasing to price increases in the range of around 10 cents per gallon in nearby markets. So much for the 3 cent price decrease. At present, New Orleans is almost entirely without power, so this is incredibly likely. Not only gasoline, but oil prices went up too as markets prepared for the potential scarcity. While more news on this hurricane is sure to come out later this week, you will have to follow us on LinkedIn as we will likely be writing about it and not releasing another news-centered podcast until next week. That being said, we have a new hydrocarbon history coming out, so be sure to also search RARE PETRO on YouTube and subscribe so that you don’t miss it.
This next story is for you traders and market analysts that like to listen to the show and stems from an article that RARE PETRO’s head honcho, Anthony McDaniels, passed on to the rest of the team. The article opens very simply with a single sentence: “Oil prices could be setting up for a major rally.” I ask that you reserve your skepticism for a bit because that was my initial reaction as well. Basically, it all boils down to a market indicator known as a golden cross. Now a golden cross exists when the short-term moving average of an asset crosses above the long-term moving average. More simply, oil prices that increase faster in the short term as compared to the long term leads to a very bullish indicator. The last two times we saw this was back in (surprise surprise) the aftermath of the 2008 financial crisis, and back in 2018 when we saw that run up to almost $80. Because of the historical significance and irregular occurrence, some analysts are confident we may see a 20 to 50 percent runup in the near future. That means oil prices will be in the range of $80 to $100 if this estimate is indeed correct. The added upside is that energy stocks would be primed for a takeoff through the last third of the year, compounding the effect of increased commodity prices. While this is of course mathematical speculation, you can learn a lot from history and geometry in financial charts so go ahead and keep this story in the back of your mind for the next few weeks. If it turns out to be right and all of your friends want to know how you became such a market guru, tell ‘em RARE PETRO learned you up.
To close things out we’ve got one final story as an update to last week’s episode. We talked about how the EPA was going to release a new biofuel mandate that had the potential to call for less biofuel. The key stakeholders were refiners (the producers of fuel), corn farmers (the producers of ethanol feedstock), and now the American Bakers Association (a fellow grain-based lobby group). The ABA was meeting with the EPA to recommend lowering the amount of biofuel required by the mandate as grain commodities race for the stratosphere like Jeff Bezos. Well, it turns out the EPA listened as they proposed a retroactive reduction in biofuel mandates that should have reached the White House’s desk last Thursday. The EPA said, The proposal aims to get the (Renewable Fuel Standard) program back on track while addressing challenges stemming from decisions made under the prior administration.” Veteran move right there, always easier to divert blame to another group. Still, rumors from Reuters reveal that while we are reducing the mandate for 2020 and 2021, 2022 could be the year of increased demand for biofuel from a future mandate. This allows a bit of breathing room for refiners whose profit margins have been razor-thin. While this prevents the cost of gasoline from rising, it will also (hopefully) prevent the cost of corn from rising to levels that we only see in times of financial devastation.
But that is the end of today’s episode! As always, we hope you employed it, even if some of the news isn’t exactly fun to talk about. If you think anything we say is absolutely ridiculous or that we presented a story from a totally biased perspective, please e-mail us at email@example.com. We welcome all forms of criticism, and you just might receive some RARE PETRO swag from exercising the courage to promote further discussion that we may even use in a future episode. While you don’t have to click the follow or subscribe buttons, we encourage you to at the very least treat them like a reservoir with low permeability and absolutely obliterate them. But again, this has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!
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