China reopens its borders, coal eager to save the day, and a whole lot more of updates that are long overdue.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian bringing you another episode of Monday Madness on December 19th, 2022. Merry Christmas folks! I just got the Christmas tree up last night, so perhaps I am a bit of a late bloomer. Either way, the Christmas tree was only 10 dollars so I really got to let my inner Scrooge shine. Ahhhh, I’m just messing around with ya. This is one of those times of year that is exemplified about giving. Reach out to those friends and neighbors who may be a little bit more lonely this holiday season. Give to someone who would have not expected it. In fact, you can give the gift of knowledge by sharing this very podcast with someone else who is curious about the world of energy! But I know you didn’t come here to listen to me twist the true meaning of Christmas into the consumption of RARE PETRO media, you came here for the media itself! Let’s take the next ten minutes to dive into some of the most revealing statistics and insightful news stories regarding the state of the energy industry.
WTI seems to have found its legs. Last week it opened up pretty close to $73 a barrel. It reached its peak Wednesday and Thursday at around 77 and a half. Friday it fell to just a little bit higher than where it opened in the week. Now we’ve got some volatility that seems to be pretty damn similar to what we saw last week. At the time of recording this podcast, the price is $76. Brent stays leading with a similar price movement pattern, but the spread between the commodities has deceased to less than $4.50. This suggests increased interest in American commodities, but we will have to see some long term stability of a $2 or smaller spread for any significant interpretation. US natural gas prices are quickly deflating. Last week we spent a few moments above $7. This week we open just above $6 with a current price of $5.87. Ouch. Certainly not what you would have expected given current weather patterns and political events, but patience will likely be key here. A large part of decreasing commodity prices could be related to policies being enacted regarding price caps in the EU and the ability for the US to deliver, but more on that later.
Next is the rig count. The most recent data shows that the US experienced a 4 rig decrease last week bringing us to a total of 776 rigs which is still 197 more rigs than we had this time last year. Basin by basin we see a surprisingly great week for the Haynesville as it adds 3 rigs to its total. This was counterbalanced by the DJ-Niobrara, Eagle Ford, and Williston each losing 1 rig. State by state this puts Louisiana up 2, and Alaska and Mexico up 1. Otherwise we have a stocking stuffed with assorted losses between Colorado, North Dakota, Oklahoma, Texas, and Wyoming. Even the Gulf of Mexico lost 3 wells. Most of the emphasis in change has shifted towards gas wells, though the horizontal well category remains king. With the way commodity prices are heading I wouldn’t bet on huge gains to the rig count any time soon. Folks at this point are happy to be out of 2020, but there is still a severe lack of funding going to new projects. Companies are continuing to pay down their bets and divesting away from things that better fit their portfolios. It sounds all negative, but don’t worry, the year over year change is still majorly positive, and that is a much more meaningful stat.
Lastly of course is the inventory report from Nick Fernhout. He’s headed on vacation soon, so the next two issues will be written by yours truly, though he has been doing an excellent job! Here is the text from last week’s report in case you missed it: The market was due for a swing in the other direction, and today that swing came, and boy did it ever! Not only did we depart from the month long pattern of draws, but the build this week is a large one at over 10 million barrels! Not only surprising for us at home, but apparently to those at the EIA too, they had forecasted a draw of over 3.5 million barrels. The API also forecasted a decent sized draw of nearly 4 million barrels, but must have also been surprised when they went to fill in the actual column with a build of 7.8 million barrels. This weeks build has largely been attributed to weak global demand for oil, economies are slowing, particularly in China. Another factor playing a part in this week’s over 10 million barrel draw is the SPR, which released 4.75 million of crude this week. Releases from the SPR are slowing, however, it has yet to be refilled. Like oil inventory, gasoline is also up this week. Gasoline prices have followed the laws of supply and demand and are, much to the consumers delight, on average down this week. The national average now sits at $3.193, right about the same it was this time last year. Gas in Hawaii is the only place where it is more than $5 a gallon, while in Texas it costs just $2.653 a gallon. Diesel has become $0.17 cheaper this week and is, for the first time in a long time, now under $5 a gallon. Inventories of diesel are beginning to catch up to where they should be in the midst of slowing economies and a worsening COVID situation in China. Propane/propylene stocks have remained strong, although are flattening out the last 2 weeks or so.
Thank you again Nick for another stellar report. That closes off our statistics section and now brings us to the current events. We were talking about gas earlier, so it only seems fitting that we consider a recent price cap announced today by the EU. The European commission originally suggested a cap of 275 euro per Megawatt hour, though other pro-cap countries argued it was far too lofty of a goal. Poland, Belgium, and Greece all acknowledged that the cap needs to be lower than $200 euro per megawatt hour in order to make an effective difference. Germany supported the gas cap, but raised a rather interesting point: a price cap could negatively impact Europe’s ability to attract natural gas supplies in already competitive markets. After all, who wants to sell commodities at a severe discount if they could deliver to any other market that desires it? Once triggered, this cap will prevent trades being done on the front-month and front-year contracts at a price higher than $35 above a reference price that comprises existing LNG assessments. This will still allow the bloc to bid above market prices if they need to attract gas in tight markets. While it appears they will move ahead with full force on the cap, other organizations have voiced their concerns. The European Federation of Energy Traders said, “Even a short intervention would have severe, unintended consequences in harming market confidence that the value of gas is known and transparent.” I, for one, share this concern. Why would China want to send LNG to anyone within the European Union if Norway is right next door and willing to pay something that is closer in fair price to global markets? I hate to say it, especially around Christmas season, but the free market operates with many players operating in a transparent fashion. It does not, however, operate on goodwill and kindness. Rather than working to better secure their own energy resources the developed world continues to manipulate markets for its own benefit as energy becomes tighter globally. All of these so called “solutions” are kicking the can down the road, and I shudder to think where millions might find themselves next Christmas.
Unfortunately, some are struggling with the worst of things already. Russia continued its attack on Ukraine by targeting the capital of Kyiv with self-exploding drones and cutting power supply. Ukraine has been receiving near unlimited funds and weapons to fuel their defense, so they were able to shoot down 30 of the 35 drones. Russia has been targeting critical infrastructure and transmission lines in order to disrupt the flow of energy without directly throttling gas supplies, or at least any more than they already are. Now it seems Putin has traveled to Belarus to meet with the President, his strong ally. Some are speculating that this is a meeting for Putin to push Belarus forward in taking a more hands-on role in the invasion. If this is true, I believe we have laid the perfect foundation for a large-scale war in Europe. I sure hope it isn’t World War III if it does continue to escalate, but much of the West seems intent on sticking its nose in places it doesn’t belong. If a war emerges, energy resources will only become that much more difficult to come by.
Folks this is a very strange time to find oneself. In a world of globalized production, efficiency, and effective technology we find ourselves short of many of our needs. Any energy policy that continues to push us further down this path is an ignorant and direct attack on the underprivileged in our society. In our pursuit of a clear future we have stretched the wallets of the lower class to the breaking point. So far our trajectory has not changed much. One of the best things you can do to continue in protecting yourself is learn. Learn as much as you can about markets and energy landscapes. The RARE PETRO podcast will continue to put out engaging and informative content that gives you the tools you need to become the best energy professional you can possibly be. If the podcast isn’t enough, go ahead and check out our website which has fresh written periodicals. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!