Desirable inventory reports, delicious confirmation bias, and a letter to the people.
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you a very merry episode of Monday Madness. Touring and recording from the road as I am now in Palm Springs California meeting up with family for the holidays. Get to spend a full week in the beautiful and sunny weather with some people I really jive with. I hope you all find time to spend with some people that you like. If you have the space, reach out to someone who may not have plans for Christmas this year. That neighbor down the street with a heart of ice. A friend who isn’t able to go home for Christmas. Someone who lacks a support group. These past 2 years presented a lot of unique challenges for all of us, and I can speak from personal experience when I say this: a little kindness goes a long way. If you can invite someone to share food and drink in your home, they might be endlessly grateful. I really do believe that if you put good intentions out to the world, they find their way back. But you didn’t come here to listen to me spout about Christmas Karma, you came to hear about the most impactful data and news in the world of energy. Let’s do it.
First, commodity prices. The good news is that WTI hit a high of $72.76 last week. The bad news is that it is currently $66.29. Monday volatility is to be expected, but this got pushed down pretty low in price. No idea why we are seeing a sudden drop, but I expect some sort of price rebound through midday or by the end of the week at the latest. Natural gas has flipped the script. It did fall to lower prices through the weekend, but right now the price is at $3.85. I don’t think it will get any higher than that today, but January will bring much colder temps and higher demand for an already tight commodity. Not a lot to report on here, so let’s just move on.
Now for the rig count. The holidays seemed to have slown activity down just a little bit. While the changes may be few, they are for the better. The US is up 3 rigs according to the most recent rig count which brings us to a total of 579, or 233 more rigs than we had this time last year. The Permian maintains the status quo of leading the pack and tacked on another 2 rigs. The Ardmore Woodford and Haynesville followed with 1 rig each. The Marcellus was the only one to show up to the party with fewer rigs. It lost 1. State by state gets a little more exciting with Texas up 3, Oklahoma up 2, and Pennsylvania and Louisiana up 1. The biggest loser was West Virginia who lost 2, while California and New Mexico lost 1. The net new rigs will be targeting mostly oil and are vertical. Offshore rigs also found a way to increase by one bringing the total from 14 to 15.
Next is the inventory report which you could have caught on our website. I know I harp about it every week, but if you haven’t checked it out yet: do it! I really do think you will enjoy it. Go to www.RAREPETRO.com and navigate to the “Thirsty Thursday” section. You get to learn a new cocktail every week, and you get to nerd out over some inventory data. You get a free pass on missing last week’s but here is the data to get you caught up. The EIA has been posting great results so far. This time last year we saw a build of about 15 million barrels, so it is nice to see that is not the case this year. While the EIA predicted a 2 million barrel drawdown it was actually much greater at 4 and a half million. The API also expected a draw of around 2 million barrels but reported much more meek results with an 800,000 barrel drawdown. While the API has been predicting much smaller drawdowns in magnitude, both agencies agree that it is in fact a drawdown. This is now 3 straight weeks of drawdowns which we haven’t witnessed since September. This also brings oil inventories quite a bit lower than the historical 5-year range. So far so good, and the good news continues with commodity prices. While crude prices did dip into Wednesday, they are making a strong effort to close the week out higher than it opened. While a good price come Friday afternoon is not guaranteed, the long term suggests promising results. Natural gas continues the eternal struggle as it bounces back and forth between short-term ceilings and floors. It is too difficult to predict where the price will be in a month’s time, but the extreme volatility is indicative that something could pop soon. Last report gasoline inventories spiked 4 million barrels and prices fell around 2 cents per gallon on average. The most recent data suggests that gasoline inventories fell by about 700,000 barrels which again brings gasoline lower than its 5-year historical range, but not by much. The average price of gasoline fell by more than 2 cents across the US. Some states are one again witnessing prices lower than $3 a gallon. While this is good news, this is still an incredibly underwhelming response considering that millions of barrels of crude are being mobilized from the SPR and the EPA reduced the required amount of ethanol that is to be blended in fuels. While this 2 cent price decrease is greater than the less than 2 cent change from the week before is a minimal improvement. The downward price action is going to have to accelerate if the Biden administration wants to claim any credit. We find it unlikely that fuel prices are going to make decent improvements at the start of next year. Distillates had a surprisingly large draw but it was just small enough to remain within its historical 5-year range. Propane also had a bit of a draw which pushes it lower than the historical 5-year range, but only barely. While not incredibly exciting, I think this is the most action we’ve seen in these two categories for months!
That rounds out the statistics. Now we will discuss some of the biggest stories. I’d like to start with what I consider to be one of the best topics of all: confirmation bias. If you have been listening to this podcast for some time, you would know that the RARE PETRO organization is incredibly bullish on oil, especially in the sense of the WTI price. Turns out that Goldman Sachs shares a similar outlook. While the future is not set in stone, they predict that oil demand will see a new peak in 2022, and another in 2023. On top of this, they mentioned $100 oil is not out of the question as demand was quickly rebounding before Omicron, and air travel is expected to get more popular as well. Areas like Asia, Australia, and New Zealand were initially very aggressive on travel restrictions. Still, these factors are small potatoes when compared to the future. The company predicts 2 outcomes that may justify a $100 barrel. The first situation is simple: there is inflation everywhere in the economy (especially in energy) so oil services may just become that much more expensive. Since we are incredibly dependent on the natural resource, we will pay whatever the price is only feeding back into that cycle of inflation. The second scenario involves a much simpler situation, and one that I feel is rather likely: The demand for oil outpaces the available supply. We are already knee-deep in that issue. Reserves have been trending downward, and there is not a lot of investment in new production. COVID has decreased the demand for oil, but there may not be enough oil to go around should we fully emerge from the pandemic. Goldman Sachs considered the price of oil hitting $110 in this situation, “quite conceivable.” OPEC+ plans to meet soon to address the possibility of production restrictions much more, but that may not come until the new year.
If you remember last week’s episode, we talked about how the Cambo Oilfield will be put on hold as Shell relocates. This may leave the UK short of its necessary oil and gas resources to properly function. Now a letter has been written in an attempt to address the “hostile investment environment.” The letter, from Aberdeen & Grampian Chamber of Commerce, supported by The British Chambers of Commerce and Scottish Chambers of Commerce, has also been signed by 58 leading figures from business and civic life in Aberdeen. Basically, lots of people see a problem with failing to take advantage of developing this field, and they talk about far more eloquently than I ever could. Here are some excerpts from said letter: A transition, by definition, is a change of state over time,” it says. “This is one of the most complex challenges we have faced in our history and it doesn’t lend itself to a simple, ‘Who’s good, who’s bad? Who’s green, who’s not?’ approach. To characterise it in this way is overly simplistic.
“We must now pause and allow for a reasoned debate about our energy future to take place. At the same time, we urge politicians to reflect carefully on their public statements on oil and gas and the impact they have on investment in the industry. We must not create an adverse policy environment at this crucial moment in our energy transition journey.”
The letter goes ones to talk about the EIA’s predictions for 2050, and how a significant amount of oil will still be required. They say: “there is no current future scenario where there is not a requirement for some oil and gas. It continues to be required for people to travel, heat and power their homes and for the manufacture of many everyday goods. This leaves us with two options; to produce this domestically, with full control over the regulatory environment in which it is extracted; or to import an increasing amount of our energy, with the heavier carbon toll that shipping it from other parts of the world carries. The latter makes little economic sense, and even less environmental sense.”
There’s not much for me to expand on here as they have hit the nail on the head. People are scrambling now to secure energy resources before it’s too late, and maybe it took Shell leaving the Netherlands to bring the rest of the world to their senses.
But folks, that is all I’ve got for you today. If you enjoyed this episode, go ahead and subscribe! We should be releasing our monthly news lookback tomorrow in the form of Basin Breakdown, so you won’t want to miss that. If you have any questions about energy, shoot us a message at podcast@rarepetro.com. We will be sure to address your questions in a future episode. Thank again for tuning in, happy holidays, and take care, everybody!