Join your host Tavis as he talks about mediocre statistics, Iran’s growing number of enemies, and rural energy co-op issues.
Audio Transcript
Alrighty everyone, welcome back to another episode of Monday Madness. I’m Tavis Kilian here on behalf of RARE PETRO on this glorious morning that is the 9th of August. The Olympics has ended, and I enjoyed them this year. I had a buddy that particularly enjoyed the Men’s 3×3 basketball championship tournament. He described it to me as a Monty Python sketch which I was incredibly skeptical about. Well, after reviewing it, he was definitely right. Broken shoes, broken ankles, ripping threes from way out that would airball… I definitely recommend giving it a peek as you will spend the whole game asking yourself: “Is this real?” But I know you didn’t come here to listen to me critique the greatest athletes in the world from the comfort of my padded desk chair, you came for the biggest events and statistics in oil and gas. Let’s get into it!
Let’s get the tough stuff out of the way… WTI is at $66.64 right now and came dangerously close to touching $65. Last Monday I said how it is possible prices will go back up, but we will have to focus on the long term. I didn’t expect prices to fall from there as they were in the mid $71 range. Yet here we are after a full week of downward price action. Again, focusing on the long term is the best way to navigate this as RARE PETRO has spent dozens of hours explaining dozens of factors that will likely push WTI (and oil benchmarks in general) even higher. Don’t forget that even in mid-July we saw prices this low before they climbed back up to $74 dollars. The biggest factor pushing these prices down right now is COVID. The new delta variant that cropped up a couple of weeks ago is now spreading its way across East Asian countries and scaring many. Beijing health authorities said all large-scale exhibitions and events will be canceled through August. It is incredibly likely that we will see more travel restrictions and lockdown mandates from certain countries and even some US states. This will absolutely decrease the demand for oil, but remember, companies aren’t drilling as many new wells as they have in the past. They are paying down debt or extending maturities and making use of their remaining DUC wells. If anything, another global response to COVID could just pull the slingshot back even further. Soon enough it will have to let loose and launch the price even higher! So please be patient my friends because there are definitely better days ahead.
If you remember last week’s episode we saw the rig count decreased by 3 which was the biggest drop of the year. Fortunately, that left us with nowhere else to go but up. We saw a total of 3 rigs going up last week leaving us with a net change of 0. As far as the major basins go, the Ardmore Woodford, DJ-Niobrara, and Granite Wash basins each gained a rig. State by state, Wyoming dominated with 3 new rigs bringing their total from 13 to 16, and Texas and Cali both lost one rig. Texas is fine as it still has 229 rigs, but California’s total has now dropped to 5 tying it up with the state of Alaska. The types of wells being drilled are dominantly horizontal, which shouldn’t come as a surprise to anyone. Not a whole lot else to say about this statistic, so let’s be patient and see what happens next week.
Lastly, of course, is the inventory report. Last week’s episode of Thursty Thursday featured a recipe for an old-fashioned cocktail, so head to www.rarepetro.com to make one for yourself and follow along with the figures. If you missed it, here’s a quick recap: The EIA predicted a 3.1 million barrel drawdown. They were only half a million barrels off… if we looked at the absolute value of the results. The resulting build was actually 3.6 million barrels. This is 1.5 million barrels greater than the build we witnessed 2 weeks ago so hopefully, this isn’t the beginning of an established trend. The API expected a smaller drawdown of 2.9 million barrels, but they were a little bit closer to their estimate. They reported a tiny drawdown of almost 900,000 barrels. In far better news, gasoline inventories saw a 5.3 million barrel drawdown on the week. If this trend carries through next week it is likely we will set new 5-year lows. Prices are on a mad dash to the top as they increased 2.4 cents per gallon in just a week. This puts gas at more than $1 more expensive than it was a year ago. Soon it will be more cost-effective to replace your car with a steam engine and power it will actual dollar bills.
Overall, very mediocre week. Prices fell, a few rigs went up, and crude built a bit. Strangely enough, the best news was the gasoline drawdown, so celebrate the small wins when you can.
Next, we’ve got a few news stories to get into. Last week I talked about an Israeli-owned tanker, Mercer Street, that was attacked with one-way explosive drones. Pretty much everyone agreed that the attack came out of Iran. Tensions were already high, but a tanker carrying bitumen was the target of a hijacking attempt in the Gulf of Oman. This tanker was instructed to travel to, you guessed it, Iran. In an interview broadcast, the Israeli Defense Minister was asked if he was ready to attack Iran. He simply replied, “Yes.” When Iran’s Foreign Ministry Spokesman heard about this, he tweeted “In another brazen violation of Int’l law, Israeli regime now blatantly threatens #Iran with military action. Such malign behavior stems from blind Western support. We state this clearly: ANY foolish act against Iran will be met with a DECISIVE response. Don’t test us.” I still can’t believe countries communicate like this on Twitter. Regardless, this could just be a result of individual groups or the old president leaving office. New president Ebrahim Raisi was sworn in. Hopefully he takes a position on recent events involving energy. This could be the president that negotiates a deal with the US regarding our oil sanctions and their nuclear program. Tensions are high, and Israel has its hands full with Palestine, so I really hope no fighting breaks out with Iran.
I think we’ve spent enough time outside of the country, so let’s bring it back to the US, or more specifically, its rural parts. While developed areas and metropolises continue to receive funding and incentives that fuel the energy transition, the small communities of the US are falling behind. Electric Co-ops serve some 42 million people in the Midwest, like those in my home state of Iowa. Unfortunately, they sourced 32% of their electricity from coal in 2019, which was higher than the national average of 23%. Some reports believe that this is because they just have little to no incentive. Co-ops do not pay federal income taxes which in turn makes them ineligible for renewable tax power credits. They also don’t have the ability to raise equity to finance new projects because they are not directed by a board or private investors, rather, they are owned by the customers. Sometimes those same customers have strong ties to the coal industry. This has caused co-ops to start looking in 2 directions. They can either maintain the status quo or challenge it and seek to implement more green power generation. Chris Riley is the CEO of wholesale electricity trader Guzman Energy. He told the Wall Street Journal that it is not as simple as clean vs dirty. It is a question of hurting small local economies. I have to say, I agree with Mr. Riley. This almost to me seems like one of the purest forms of a free market. Enough people decided there was a need for electricity in a small area, so a co-op emerged to charge those customers for the service with no government intervention in the form of tax breaks or fundraising. The resulting system may not be able to survive an energy transition, nor would the small customer base want it. In this situation, it is incredibly likely that the cost would be passed down to consumers. Rural energy communities might push back on that as an energy transition would threaten the amount of money they have to spend on everything else. While this is certainly an interesting problem within the United States, it raises a question in the context of the rest of the world. Not everywhere in the world is New York City, Beijing, Tokyo, or France where there is a large population and expendable government budget. If small communities that don’t have access to tax credits or subsidies are asked to switch to more renewable energy sources, how are they going to finance it? What incentives will be provided if it comes as a cost to already struggling people? The developed world is in on the conversation, but there are a couple of billion people who could directly benefit from natural gas energy if they don’t have energy security. Natural gas is cheap, abundant, and affordable. Apparently, green technology struggles to exist in situations where tax credits and subsidies are not afforded. Just some food for thought.
But that is all we have for this episode. I know this week wasn’t super thrilling with less than ideal statistics and news stories with grim implications for the future, but I’m sure you learned something. If you did learn something, don’t just click that follow button… load up a couple of charges and PERFORATE it! That way you will know when a new episode comes out and you have the opportunity to learn more about the industry you are passionate about. Until we release something new, go to www.rarepetro.com to find a massive backlog of content that will keep you busy for quite some time. Thanks again for tuning in, and until we see you next time, take care, everybody!
Music: https://www.bensound.com/royalty-free-music
rural energy rural energy rural energy rural energy rural energy