Disappearing DUCs, the UK wants shell back, and the Biden administration suspends international support.
Alrighty everyone welcome back! This is Tavis Kilian bringing you another info-packed episode of Monday Madness on December 13th, 2021. Just two weeks out from Christmas and focus is starting to wane. If you are listening to this podcast right now, you are incredibly dedicated and we appreciate it! Now that we’ve been regularly releasing content for this podcast for 2+ years we have some data to look at. October through now gets incredibly slow in terms of people choosing to listen to the podcast and I can only imagine it has something to do with dedicating more time to participating in holiday events. But you… you are an extra dedicated individual who is working hard to get that extra edge on the rest in our field so well done! But I know you didn’t come here to improve our 1 on 1 relationship, you came for industry data and news and by golly, I think it’s time we get this show on the road!
We kick off our statistics with commodity pricing. WTI had a wonderful start last week as it climbed from $69.70 to $71.80. It spent most of its time between $71 and $73. This morning it had a quick run-up to nearly $70 before coming back down to $71.33. Sure it isn’t the $80 prices we saw a month ago but it is already coming up in price only a few weeks after the omicron scare. I would not be surprised if we were back in the $80 range by the time we reach 2022, but nothing is guaranteed. The good news doesn’t stop with oil as natural gas also saw significant gains last week. Last Monday it was priced at about $3.69. Since then it has slowly trudged upward to a peak of over $4 early this morning before dipping right down to where it is at $3.97. Again, nothing like the $5 prices we enjoyed a month ago, but it seems that the commodity is still valued by somebody as its price continues to increase. We are growing nearer and nearer to winter as it approaches on the 21 of this month. Cold temperatures are only going to stimulate our use of these two commodities which are already tight in supply. Sure, utility companies have secured plenty of natural gas ahead of time, but any unexpected low temperatures are going to really strain what is available. Remember when Texas was unprepared for their freeze? I hope that is not the case for anyone this year, but some folks just don’t have the required supplies secured ahead of winter.
Next, the rig count. Another good week as the US is up 7 more to a total of 576 which is 238 more than we had this time last year. No one will be surprised to hear the Permian led the pack with 3 more rigs but the Eagle Ford also saw some action as it added 2 rigs along with the Cana Woodford. The Granite Wash and Utica basins each gained a rig while the Arkoma Woodford and Barnet lost 1. Very busy week all across the board. Even split between targeting oil and gas but all of these new rigs will be drilling horizontal wells. I know each week I say good things about the rig count because it has performed well through 2021 but there is another very important metric used to gauge success: the DUC count. For those of you who may not be familiar, DUC is an acronym for drilled but uncompleted wells. These wells are great for keeping in your back pocket should some unpredictable event tank commodity prices. That way you don’t have to sink even more capital into drilling a well before bringing it online. Unfortunately, 2020 to now has been full of many uncertain events (mainly COVID) so this DUC count has been dropping. Back in March of 2020 26 rigs were added to the DUC count bringing it to a total of 8.5 thousand. Then prices cratered and there were 3 months of pretty crazy gains bringing the total to 8.9 thousand. Those were the last builds to the DUC count we saw. Starting in July of 2020 we have witnessed a drawdown in DUCs every single month at an average rate of 237 per month. At this rate, we will have run out of DUCs as soon as July of 2024. Right now the total is at about 5,000 (or even lower since the most recent data made available on stretches through October). This is bad news folks. Combine this with the lack of intent to produce domestic oil and diminishing reserves and you don’t get pleasant results. 2022 is going to be an incredibly interesting year for energy.
Lastly, for statistics we gotta peep the inventory report which was released on our website as the weekly Thirsty Thursday report. That one was a lot of fun and featured a recipe for spiked eggnog, but I can get you caught up on all the inventory data you may have missed. The EIA was feeling pretty bullish after a couple of weeks of predicted draws being true. They bucked up and predicted a 1.7 million barrel drawdown, but they overshot by a mile as the actual drawdown was just shy of a quarter-million. The API posted wildly different results. They reported a 3 million barrel build after predicting a 2.5 million barrel draw. Although the two reports were wildly different they both resulted in a drawdown, and that is something we can all be happy about. The price of oil is just going to climb which will likely make everything more expensive, so thank goodness we are in the industry of energy. The latest EIA data shows that we are actually much lower than the average range of the previous 5 years. This will likely continue through 2022 as the current administration shows no signs of making domestic production any easier. Gasoline inventories ended up spiking almost 4 million barrels even though production decreased once again. Perhaps fuel refiners are pulling back on production now that the SPR release has occurred? Either way, the bigger news for gasoline is that the EPA has decided to relax ethanol standards for fuel. Since ethanol prices have been increasing, they have decided to reduce the amount of ethanol required for blending. This should also help to bring down gas prices in the near future. The price of gasoline decreased by less than 2 cents each week for the past two weeks. The average price went up about half a cent this week likely because the EPA’s announcement hasn’t had enough time to factor into pricing. Still, the cost of refining the more sour crude stored in the petroleum reserve has likely leveled out whatever favorable market sentiments pushed the price downward, so if this EPA announcement doesn’t cause pricing to fall any lower, I’m not sure what will. Distillates and inventory reports have become like good friends at this point. They might fall short of expectations, but they rarely disappoint. They continue to hug their lower boundary and trade within familiar ranges.
But that is all we’ve got in terms of data so let us now look at some current events. It turns out that Shell leaving the Netherlands has also impacted the UK. Deciding to relocate meant that they would also withdraw from the UK’s Cambo Oilfield project. This means their 30% stake in the field will be removed leaving Siccar Point with their 70% stake which is not quite enough to continue with the predetermined plan. Siccar Point’s chief executive said, “we are in a position where the Cambo project cannot progress on the originally planned timescale.” The company plans to work with the UK government to see what options are available as they do believe the field can generate a decent amount of returns and improve the UK’s energy security, it just might not happen as soon as they had anticipated. This is about the worst time this decision could come because the energy crisis across the pond is only getting worse. Environmentalist groups were pleased with the decision despite this. The GMB energy union secretary said, “The cheerleaders for Cambo’s shutdown aren’t just throwing energy workers under the bus, but also our security of supply for the gas we will still need on the road to 2050.” I have to agree with this statement. I can’t believe parts of the world continue to accuse conventional energy companies of polluting and taking them to court with their “crimes.” You keep pushing and pushing and eventually, these companies will decide they are fed up and leave. Now you lack the required resources to develop energy for yourself. I’m curious to see how the UK navigates this because their household energy bills were already expected to increase quite dramatically. Going to be an interesting decade for sure.
Next, the Biden administration has continued down the path of aggressive anti-hydrocarbon policymaking. There has been an order for the immediate halt to new federal support for coal plants and other carbon-intensive projects overseas. A message was sent late last week to all US embassies and could potentially change the way billions of dollars will be allocated. Again, this is for new support so any funding for existing projects remains unchanged which really surprised me. What does this mean for other countries? Well, any country that wants to build an LNG terminal for receiving shipments may have to think twice. Support that could have subsidized the development and allowed places like the Caribbean to have better access to the US’s gas will have to turn towards other solutions, and I think the world leaders expect them to go the renewable route. Can you think of what else this might unintentionally accomplish? It creates a market for countries like China or Russia to invest in others and better expand their footprints around the world in the name of providing affordable energy. If the energy transition proceeds the way we expect, China might be able to get land for cheap and develop international trading hubs or facilities for processing energy resources that the host country may not have access to. I’m surprised to see what effect this will have down the road for energy development in countries that may not have the resources to do it themselves. I think this has the potential to be a landmark decision in hindsight, but for now, it hasn’t necessarily surprised too many.
But that is the end of today’s episode. We hope you enjoyed it, but if you didn’t: shoot us an email at firstname.lastname@example.org. We welcome criticism with open arms and are even willing to cover a segment of your choosing should you want to learn more about a specific topic. We are big fans of research and independent learning in this organization so no topic is off-limits (as long as it has some ties to energy of course.) This has been Tavis Kilian with RARE PETRO, and until we see you next time: take care, everybody!