Nonexistent long positions, reaching under the table to secure more oil, and the beginning of the end of the Nord Stream.
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Audio Transcript
Alrighty everyone welcome back! This is Tavis Kilian with RARE PETRO bringing you the latest episode of Monday Madness on August 22, 2022. Not only that, but I’m bringing you some news! You likely know this company as many things: advisor, business developer, consultors, content distributor… truly the list is extensive. Still, we continue to grow and we can now add another hat to the company’s already crowded head: operator! That’s right. Content has been a little slow because the team has been busy getting that up off of the ground. We hung signs and got familiar with the Bakersfield properties last week, and we have indeed hit the ground running! Exciting stuff and I feel very lucky to be a member of this team. But you didn’t come here to listen to some young engineer boast about the ultra cool professional endeavors he’s involved in. You came here to get the scoop on the biggest statistics and most revealing stories within the world of energy. Let’s get to it!
First of course we take a look at commodity prices. Early this morning the WTI price sits at $87.42 Now don’t be alarmed! I know that sounds low, but it’s doing the same thing we saw over the past 3 weeks. It spends all week getting up to somewhere between $90-$92 only to falter right at the end and fall back below $90. As a matter of fact, the price spiked to about $91 this morning before getting wrecked by some early volatility. Now I’m researching this portion at about 8:00 AM Pacific time so I think it is totally likely the price gets back to about $89 by end of the day, but nobody can be certain. I don’t see a ton of changes in current events that would suggest significant upward pressure later this week, so a $90 barrel will be about the norm. On the brighter side, natural gas gained almost a dollar from Friday to now. It spent most of last week between $9 and $9.50 but nearly smashed the $10 mark this morning before pulling back to around $9.70. It looks like we’ve got a nice head and solders pattern on this bullish trend implying that natural gas shouldn’t become more valuable than the $10 mark if not less (at least in the short term). Natural gas is becoming a hotter topic as temperatures cool down. Supplies are growing tighter as everyone rushes to stuff as much as they can into storage for the winter. I anticipate natural gas will stay around this $9 if not higher through winter. I just don’t think it is a question of supply so much as it is a question of capacity. Russia was responsible for a gargantuan amount of gas delivery thanks to its insane amount of infrastructure. It is foolish to think we can circumvent that infrastructure or replace it in a short time frame. In short, WTI will have its turn to be in the spotlight later this year, but for now natural gas will be running up to crazy prices through winter.
Next of course is the rig count. The past 2 weeks have shown shrinkage, though last week’s could be argued as a freak accident. Nonetheless, I believe I said everyone should remain calm unless we saw the 3rd week of a net decrease. Well… that week is here as the latest report shows a 1 rig decrease to 762. This still leaves us up 259 rigs on the year. This is the longest streak of rig decreases we’ve seen in 2022. Basin by basin change was minimal as we saw the Cana Woodford and Permian each drop a rig. Otherwise, there was no change. State by state we see that New Mexico bounced back from a recent rig decrease and added 2 to their total. Everyone else maintained except for Texas who dropped 3. The Gulf of Mexico also saw no change. While it is possible everyone is slowing their growth in the drilling space, it could also be a temporary response to falling commodity prices. Yes, oil was closer to $120 not too long ago, but $90 a barrel is still an excellent price. It seems producers are just more excited to exercise capital discipline which isn’t the worst idea considering the fallout of the shale revolution.
Lastly, we are going to look at the state of domestic inventories. While we didn’t release a Thirsty Thursday report last week, our intern Nick will be taking over this week. Until then, I’ll get you caught up on the latest data. The EIA predicted a meager quarter million barrel drawdown but reported a dramatic 7 million barrel drawdown which was much needed after a few weeks of builds. The API seems to disagree as they predicted a drawdown of 117,000 barrels and still undershot it, but only by about 300,000 barrels. While I can’t tell you why there is a 6.5 million barrel discrepancy, I can tell you that this did wonders for commodity prices at the end of last week. Even gasoline saw a big drawdown at 4.6 million barrels. This did not stop the fall of American gasoline prices as they quickly approach what they were before the Russia fiasco. This still leaves them very high, and if I had to bet, I don’t see them staying this low for that long. Regardless, the US average gasoline price is below $4 per gallon which is something we can all be happy about. Distillate stocks experienced a small build which was expected for the time period, and propane continues to hug the low side of its 5-year historical range.
Healthy commodity prices, a decreased rig count, and diminishing inventories. Lots of mixed news this week that will likely hold commodities right where they are.
Next up, a little piece of information that Anthony McDaniels brought to our attention. WTI traders have decreased their net long positions for the fourth week in a row. Because of this, net long positions remain at their lowest since April of 2020, the month when oil prices went negative for the first time in history. This isn’t unique to just WTI as those who trade Brent are exhibiting the same behavior by reducing long positions and adding to shorts. We at RARE PETRO are incredibly confused as we constantly harp on dozens of reasons why we feel commodities are just in the infancy of an incredible upswing. Still, we don’t know everything so we will continue to read the writing on the wall, though the bullish attitude stands.
Now for a look at the EU. They drew a line in the sand when they drafted the ban on seaborne imports of Russian oil that would be implemented on the 5th of December. Thing is, they have been routinely reaching over that line to get real friendly with Russia. Last week, seaborne exports of Russian crude rose to their highest level since April according to Bloomberg data. While there are exemptions built into the impending ban for those who cannot find alternatives to Russian-supplied energy, just about everybody is importing it as seaborne crude finds its way to the Mediterranean, Black Sea, and North Europe coasts. From there it will be mixed into other large stock tanks and be forgotten, though Russia will have already pocketed the profits. I’m excited to see what happens in the coming weeks. I predict that Russian crude will continue to become more and more valuable as people secure enough oil to get them through the winter so that new solutions will hopefully be developed by the time supply runs out. You might be asking yourself, “What.. doesn’t that completely nullify the effectiveness of the ban?” Yes. Yes, it does. Makes it a great show of political theatre as people pretend to continue to oppose Russia’s war, but their pocketbooks don’t lie.
It would seem that Russia is doing its best to play along. New news suggests that Russia may cut all gas deliveries for 3 days from the Nord Stream to Germany due to unplanned maintenance. This pushed European benchmark prices up as much as 25% in a single day. The maintenance is hoping to address issues at the Trent 60 gas station and will be requiring services from Siemens. Gas deliveries from the pipeline are at 20% of capacity and some folks worry that this will be the final nail in the coffin. This is likely why US natural gas prices are up so much today. Work will be started on August 31st so keep your eyes peeled. Even if deliveries aren’t halted, Russia will be making more money on energy sales than it would have without announcing the news. At this point I feel like Russia just makes vague empty threats, commodity prices increase, and all of Europe buys as much energy as they can get their hands on before winter. They turn a blind eye to each other as they hand more money to Russia who simply has to make another idle threat to turn a larger profit. It is laughable. Russia’s ruble continues to gain some strength, though it has cooled off in recent weeks, but the country’s economic position only continues to improve.
Folks this is a strange set of circumstances, but I can guarantee you that it is anything but the end of conventional energy. Oil may be at price highs, but a gallon of crude oil will still cost you less than a gallon of milk. The stuff is still so cheap and useful that I don’t see the world abandoning it as they claim. There is plenty of information to sift through, so I’ll propose a deal to you dear listener. We will continue to research and do all the heavy lifting. We will write podcasts, conduct interviews with industry leaders, and continue to construct excellent content, and all you have to do is click that little follow button. Sound like a deal? Good! I can’t hold you to it, but I appreciate a good handshake deal. That brings us to the end of this episode. You can find tons of other content on www.rarepetro.com. Otherwise, wait patiently for another podcast and check our LinkedIn to be notified whenever we post something new. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!