Steady or exploding stats, a distraction through war that could decrease supply, and an African country floundering to effectively use coal.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you a much delayed episode of Monday Madness. I’ve finally finished up that project that was soaking up all of my time, but now I am back in Colorado. Content should become a little more frequent and regular in the coming months as I get settled back into things here. Even so, I would still like to extend a thank you to Nick Fernhout and Nick Bryan for holding things down. They have put together some great periodicals that you should definitely check out if you haven’t had the chance yet. Super relevant to now, and well written, though I don’t want to spoil any more. You can find them on www.rarepetro.com. Other than that, I think it is about time we dive into the most significant stories and impactful statistics regarding the current energy landscape.
Commodity prices. How are those holding up? We are looking at some modest early morning gains, though things have certainly been better. One month ago WTI was prices above $85, but then it began its decline. Since then it has been a trendline downward to a low of $71 just last Friday. At the time of writing this script the price is back up to about $73, but it doesn’t look like prices will be getting much higher any time soon. Brent has performed about the same but maintains a $5 premium when compared to WTI. Natural gas has been behaving a bit differently. A month ago it was a hair below $6 and starting to climb. Around Thanksgiving it hit a peak of $7.70, though it fell right back to about $5 in the coming days. It has since returned to today’s price of $6.60, though it looks like it will continue to climb whereas the crude commodities seem intent on falling even further. It sure seems like a strange time for the price to fall this hard, but there have been dozens of factors in the past 2 months that I have just not been covering with the frequency you’ve come to expect. Keep an eye out as nothing is guaranteed and this holiday season has been proven a rather tumultuous time in previous years.
Next up is the rig count. The most recent report reveals a 4 rig decrease in the United States leaving us at a total of 780 rigs. Don’t be too upset as this is still 204 more rigs than we had this time last year. That’s the more important of those two statistics. The basin that experienced the most change this week was the Granite Wash which added 2 to its existing 4 rigs. That’s significant growth! Otherwise the Eagle Ford and Barnett gained 1 rig each. The Ardmore Woodford, Cana Woodford, and Mississippi each lost a rig. It hurts most for the Mississippian who only had 2 rigs in the first place, but that’s just how the cookie crumbles. If we look from the state perspective New Mexico is up 3, but every other change was 0 or negative. Alaska and Oklahoma were each down 2. Texas and Wyoming were down one. The gulf of Mexico found some room to add another rig, but other than that things are mostly unchanged. This week’s emphasis is split between oil and gas, though vertical wells are receiving a bit more attention than they were last week.
Lastly is the inventory report from Nick Fernhout. If you didn’t catch it, you can always go back and check it out on www.rarepetro.com. This is one of the most important of the statistics as it provides insight into supply and demand which is one of the fundamentals influencing price action. Here is what Nick had to say: Would you look at that, another good-sized draw this week. The EIA expected a draw of around 3.3 million barrels, and ended up reporting a draw of 5.2 ish million barrels. The API also reported a fairly large draw of nearly 6.5 million barrels of crude while they had only forecasted one of about 3.9 million. The SPR has released their latest data, showing a draw of just over 2 million barrels. While it may still be releasing a bit of oil, the amount has certainly decreased this month, a likely reason the last month has only witnessed draws. The SPR inventory now sits at 387 million barrels, lowest since March of 1984. The bar graph below makes the last month of draws pretty clear, while this weeks hasn’t been the largest of the month, it is one of the largest in the past several months! Meanwhile, inventory of crude oil is dipping even further below the 5-year range typical for this time of year. Not much new on the gasoline front, neither in stock or price. Gasoline continues to become cheaper and cheaper, and gasoline stocks have made a great recovery the last few weeks! Even managing to climb back into the 5-year range. Speaking of cheapening gas prices, the national average decreased by $0.43, and now sit at $3.295. Hawaii has the most expensive gas and is the only state to record an average over $5. Texas and Oklahoma are among the cheapest in the country at $2.733 and $2.770 respectively. Diesel has become $0.15 cheaper this week too. Distillates have made a huge comeback this week, and by huge I mean really huge! I mean look at the graph below on the left, this years weekly line has just nearly recovered to within the 5-year range. The recent build of distillates and primary diesel has largely been the result of widespread economic slowdown, as well as the events in China.
Thanks again to Nick for that great report. Now to take a look at some current events. As Nick mentioned, China’s response to COVID has always been pretty severe. The government’s actions have definitely had an effect by decreasing consumption for oil and gas commodities. That all changed last week as China has now lifted many of the restrictions and rules it had been so adamant on imposing. Folks are now allowed to isolate at home rather than doing so at a centrally managed facility. They also announced plans to stop tracking some travel which could reduce the likelihood of forced quarantine with respect to a citizen’s previous whereabouts. This is a huge step as the past 3 years have been rather overbearing for folks living in China. Imagine the first few months back in 2020 when lockdowns began. They have pretty much continued to a much greater extent in China up until now. I’d place good money on this raising oil prices in coming weeks. China has definitely stockpiled loads of oil through the pandemic and almost assuredly gets a good deal when purchasing energy from Russia, but this is such a significant change in demand that it is only a matter of time until WTI feels some upwards price pressure. Even Bank of America is predicting triple digit Brent prices once again. They said, “Our oil demand and price projections for 2023 rely heavily on robust China and India demand growth, so any Asia reopening delays could affect our expected price trajectory.” Analysts over there also believe a production cut from OPEC is just around the corner which would just add fuel to the price rally fire. RARE PETRO has been speaking on these factors for quite some time, so it is nice to see that it is finally being recognized by others in the town square.
But how are things holding up in the UK? I’m glad you asked. The conflict between Russia and Ukraine still leaves a lot of uncertainty in the energy landscape. Now, the UK’s transmission system operator, National Grid, has asked to keep 2 coal-power plants on standby should more electrical generation be required. They have now been labeled as “contingency plants” and were expected to be needed as snow fell in London. Fortunately for the UK, they had sufficient power and did not need to call on the coal plants, so they have been stood down. This is still a stark contrast from just a few years ago. It was only a few months ago in the summer when the UK decided to postpone the decommissioning of these plants, and I applaud them for making that decision. This is all a result of them being too reliant on someone else’s production. Rather than purchasing Russian natural gas, their energy prices have gone up, and they have had to turn back to coal. So much for a green transition. At this point I am curious as to how they move forward. If commodity prices stabilize and Russia apologizes to Ukraine, do these power plants go back to the chopping block? Will the UK still carry through with decommissioning even though they have demonstrated their possible need in times of an energy shortage? Unfortunately, I think their government will fail to realize these things and go back to business as usual by the time this all blows over.
Folks, I’ve been gone a minute, but not much has changed in the previous months outside of China’s reopening. Otherwise too many people are still dependent on Russia for energy commodities. The conflict between Russia and Ukraine continues. Commodity prices remain elevated and continue to eat away at everyone’s wallets. Things aren’t exactly good. As a matter of fact, I saw an article that was supposed to be uplifting. In the article, a bakery in the UK is leaving its ovens on and allowing people to pay to bake goods that they bring. This has the added benefit of conserving energy, and warming the community area above the bakery. I don’t know about you, but returning to technology and practices of the dark ages isn’t exactly uplifting. Let’s hope that not too many people struggle this winter. If you are looking for more information surrounding the energy industry you can always find more at www.rarepetro.com where tons of our own in-house stuff gets cross posted with news from all over the world. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care everybody!