Skewed inventory data, aggressive new regulations for NM, and Chinese drops in output.
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Alrighty everyone welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness for August 15, 2022. It seems we just got to the month of August and are already halfway through! Commodities are staying volatile and the world is still watching the Russia-Ukraine conflict though it seems like there is no end in sight. Way back when I would have laughed if you said this conflict could reach a whole calendar year, though now it doesn’t seem so crazy. Some hard decisions will have to be made by the time we reach winter, though hopefully, we can see a peaceful conclusion before then. Either way, the United States seems pretty intent on torpedoing itself in terms of energy independence, while the rest of the world cries for more energy. I’m no business major, but to me, that sounds a bit counterintuitive. But you didn’t come here to listen to me vaguely ramble about these details. You came here for the specifics on the most revealing data and hardest-hitting stories in the world of energy. Let’s dive in.
You know we have to first look at these commodity prices. WTI continues to see resistance at $90. It opened today at around $92 but fell to $88.50. Still, it performed strongly last week and climbed as high as $95 by Thursday, but for some reason, it lacks the strength to stay any higher. Brent performed about the same but still has a nearly $5 lead at $94 and some change. I expect these commodities to find their legs a little later in the week and I think a solid $91 to $92 barrel of WTI is still likely. Natural gas is performing in an entirely different way as it climbed to $8.80 by Thursday of last week yet remains at about the same price. It should be gaining positive sentiment as the summer draws to a close and colder weather approaches. The increased demand for natural gas for heating is certainly a bullish sentiment for everyone involved. I think prices will not see as much volatile change as we have witnessed in recent weeks, though any sudden news could easily shock markets and change this. Ultimately, some pretty standard stuff and a relatively slow opening for the week.
Next is the rig count. For the first time in 2022, we have witnessed back-to-back weeks of a shrinking rig count. The most recent report shows a 1 rig net decrease in the states bringing the total to 763 which is still 262 more rigs than we had this time last year. The basin change is pretty messy, so I’m just going to fill you in on basins that experienced change greater than 1. The Ardmore Woodford lost 2, and the Marcellus lost 3. On the bright side, the Cana Woodford was able to add 2 to its total. State-by-state change is a bit more simplified. Alaska and Texas each lost 1, yet Pennsylvania lost 2. Otherwise, Oklahoma and West Virginia added 1 each and Louisiana added 2. The Gulf of Mexico sees some big growth with 2 more rigs as well. Surprisingly we lost 5 rigs drilling horizontal hole and gained 2 rigs each in the directional and vertical categories. The emphasis has seemingly shifted from natural gas to oil with a 3 rig decrease in the miscellaneous category bringing its total from 5 all the way down to 2. I think that right there is the key to this rig count. Had those miscellaneous rigs stayed up we would have seen modest growth, but for whatever reason or project they were intended, they simply had to go. Perhaps this was a negative rig count, but I believe it is nothing to be alarmed about despite coming off the back of a 3 rig decrease. That’s right everyone: stay calm! You are only allowed to panic if we see another decrease next week. Otherwise, stay cool, calm, and collected.
Our last statistic to touch on is the state of domestic inventories. All of this data was present in last week’s Thirsty Thursday report along with a delightfully refreshing cocktail recipe. If you missed it, here’s the skinny. The EIA pretty much expected things to trade sideways, but they were blindsided by a nearly 5 and a half million barrel build. The API made an eerily similar small prediction, though their actual reported build was much smaller at just over 2 million barrels. Now it is totally normal to be initially concerned when seeing a build this big, but RARE PETRO’s own Anthony McDaniels raised a rather interesting point after OilPrice published an article about the reported build from the API. While that is certainly a significant build, you’ve got to remember that the US is still pulling about 5 million barrels a week from the SPR. Without these SPR supplies, the API reported build would have been a draw of around 3 million barrels. If you are still skeptical, look no further than the EIA’s chart showing that this is the lowest level of oil in the SPR witnessed since May of 1985. Not only that, but this is the steepest decline ever recorded. If you adjusted US domestic inventory data to factor for that additional 5 million barrels you would see there are only about 4 weeks that would have been true builds since the announcement of dipping into emergency resources. Additionally, these more frequent builds may be alarming, but consider how it has really only leveled out US crude oil stocks. We may be in for a winter of significant draws once these SPR resources stop hitting the market at the end of September. Not only that, but the US will have to spend millions on oil to replenish the SPR… at a higher price than when the SPR releases started. Gasoline stocks looked like they were close to getting back into historically normal territory, though they have taken heavy hits in recent weeks pushing them even lower. Expect continued draws through the next few months as this has been the historical trend. Even with the draws gas prices are now down to a $4 average across the states for the first time since prices took off in the beginning of this year. Today’s average for the nation is $3.99, though it ranges state by state from $3.493 (Texas) to $5.390 (California). Distillates are building slightly in inventory, but not faster than we have seen for this time period in the past 5 years. They should remain in record low territory until at least the end of the year, though RARE PETRO believes the timeframe to be much longer. Propane continues to do what propane does best: behave exactly as you would expect it to.
I know that was a lengthier look at inventories than you are used to, but I think it is important to be cognizant of the elephant in the room that is the SPR releases. Sure, things look poorly on the statistics front, but the data suggests this is just the calm before the storm. Now it’s time to get into some current events.
Now I don’t know about you, but the news of new ozone regulations in New Mexico slipped under my radar. A new 36-page document went into effect on the 5th of this month requiring much stricter enforcement of ozone monitoring and reduction. I won’t bore you with the details because the legal jargon gets pretty heavy, but know that inspection in sensitive areas (schools and residences) must be inspected far more frequently and retrofitted with better equipment. Not only this, but gas capture rates are expected to be at 98% by 2026. Now these regulations have the best intentions at heart, and I think it is important to be cognizant of emissions, but these regulations are coming during a time of record high energy prices. This will just eat into the bottom lines of more and more companies, and unfortunately, really hurt the small to mid-cap producers. Larger operators are able to stomach policy changes like this thanks to their large scales of operations, but small business owners are disproportionately affected. Does this mean that they are not fit to operate? Perhaps, but it certainly throttles competition leading to a very likely outcome of large producers swallowing up the portfolios of these smaller players. I do wish there was a way to scale these regulations in a way that keeps size in mind. Something like a tiered approach of emissions reductions based on how many emissions are actually detected. That way, the worst of the worst for each tier are actually addressed rather than making it disproportionately harder for smaller companies. The Permian is the heart of American energy production, though activity in the New Mexico side could falter on news like this. Again, I think it is great that we chase responsible regulations like this, but the unintended consequences could harm more than we anticipate.
Next, I’d like to take a look at China which I feel we have not taken a proper look at in a few weeks. The latest headlines would suggest that china is refining less and less… though nobody can be quite sure why. Chinese private refiners claim that a lot of production has slowed due to unplanned shutdowns ordered by the government. This is most likely due to the recent highs in Chinese crude processing, but when the CCP is calling the shots you can almost be certain that other stuff is going on behind the scenes. Whispers on the internet are suggesting that another COVID lockdown is incoming for China which would be a great excuse to reduce oil output entirely. After all, China bought as much crude as they could through the worst parts of 2020, and it would be a great way to get back at the West. I’m personally skeptical of this happening, though there is a non-zero chance of it happening. Either way, private refiners in China are being shushed and state-owned companies are attempting to secure more of the limelight. Something important to keep on your radar.
But ladies and gentlemen, that is the end of this here podcast. If you are looking to listen to more, you could quite literally scroll waaaay back in the catalog to listen to news from any time period and I guarantee you will hear an interesting story that will teach you more than you expected. We here at RARE PETRO are big on learning and would love to have you along for the journey. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care, everybody!