In this episode we look at volatile price movement, iffy commodity data, and the recent escalation of Middle-Eastern conflict.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on October 9, 2023. One of my favorite parts of Halloween is the influx of horror movies. I love all horror movies! Thrillers, slashers, gushers, and downright goofy ones too. My favorite kind is a long running series whether that is something like Halloween with Michael Myers or even just something as simple as SAW. I feel like it is one of the best ways to get into the season, but perhaps I’m biased. Some of my great aunts, uncles, and cousins work a haunted corn maze back in Iowa and I always had exposure to that, so perhaps the spirit of Halloween courses through my veins. But you didn’t come here to listen to my doubtful ghost stories, you came here for the most revealing statistics and biggest news stories within the world of oil and gas. Let’s get to it.
The past couple of weeks have treated us very well in terms of what a barrel of WTI was selling for. Things were getting so good that I erroneously predicted that the price floor was at $90 because of some very weak resistance. Right after I made that prediction, the price went on a multi day fall down to $82.50, so apologies for jinxing it everyone. Over the weekend the price found strength and opened up around $85 before bumping up a couple of times. The current price is about $86 and I am a little hesitant to predict an $85 floor due to last week’s events, but I’m pretty damn confident it is alright. Brent did about the same thing as it almost always does and exhibited the same pattern. Still, we are seeing that bizarrely narrow spread of just over a dollar. To me this is indicative of some big swings coming through because the relationship between these two commodities is anything but stable. On the bright side, it seems like we have arrived at the season of natural gas. Last week it broke above $3 and it went only up until about this morning where it topped out above $3.40. From there it has fallen to 3.35 and I imagine it is losing a bit of strength after such a good run-up, but fingers crossed it stays this high. I think it is more likely it starts to come back down to $3, but that isn’t the end of the world. We might just have to wait a bit before it comes back up. Overall, pretty decent news from commodities this week and I hope oil can get back up there.
Next up, the rig count. Surprise surprise, another fall. 4 fewer rigs over the last reporting period bringing the total to 619 which is 143 fewer rigs than we had this time last year. Basin by basin we actually saw 1 more rig in the Eagle Ford and Granite Wash each. One was lost in the Williston, and 3 went down in the Permian. Things are a bit more dramatic at a state level where Oklahoma gained 2 rigs, and New Mexico gained 4. On the flipside we have North Dakota and Wyoming who are down 1 each while Texas fell a whopping 7. No changes in the Gulf. Even amount of vertical and directional rigs down with no change to the horizontal population. The common denominator of those that went down are those that were looking for oil. Gas actually added to its total as people prepare for a higher gas price this winter. Overall pretty piss poor news here, but what did you come to expect? In the last 23 weeks we have seen only 3 positive rig counts. Hopefully things get better here.
For our last statistic we will see how much of our domestic inventories we worked through. I write a weekly piece on www.rarepetro.com that reviews this with some gorgeous data and a weekly cocktail recipe. Here’s what you may have missed last week. The EIA seems to believe that a season of drawdowns is finally coming to an end. They most recently estimated a little less than a half million barrel drawdown. The actual result was much better at a draw of 2 and a quarter million barrels. The API expected an even smaller drawdown of virtually no change at just 92,000 barrels. They too undershot the real result as they reported a 4.2 million barrel draw which comes as a surprise. It is usually the EIA with much larger results than the API, though this is a welcome surprise. It means we realistically saw a drawdown in the neighborhood of 3 million barrels. This means our pattern established in April of one build followed by about 3 weeks of draws continues. I imagine we will see a small build next week if not another draw of 2-3 million barrels. We are dangerously close to breaking out of 5 year historical lows in just a couple of weeks, though historical low fuel demand may help to bring that back up, but more on that later. According to government data gasoline prices are headed up while total “implied demand” is headed down. Seasonal gasoline demand is supposedly lowest since 1998 which doesn’t help to explain why these prices are at best staying the same and at worse headed up. This would work in explaining why domestic inventories are taking off, but one would think the combination of these factors would imply far cheaper gasoline. Gasoline in California has fallen back below $6 per gallon to $5.933, though I imagine this relief (if you can call it that) to be short lived. This week Georgia steals the cheapest gasoline crown from Mississippi with gasoline at $3.20. Week over week the prices for a regular gallon fell 7 cents while diesel is down about a cent. Overall good news for those with vehicles, though it seems the day of $3 gas are long gone. Distillates appear dead-set on entering historically low territory before the end of the year, though they have quite the basement to work through. Propane enters historically normal territory for the first time since the end of April, though it is just touching the top of the range. This is about the time of year we would expect it to fall, and there is plenty of refinery maintenance around the corner. Net imports of crude are up 1.26 million barrels, though total crude products are down 4.5 million barrels. That means a good amount of oil going in, but a lot of petrochemical products going out which they have been for weeks. In fact, exports have been trending upwards since about 2022 after a period of flatness since 2020.
But that is all we got for those statistics. Time to move onto some of the news. Before I get into this story I want to say: hold your horses. It would be far too easy to speculate and spin out of control. We will consider some real outcomes, but mostly facts. On October 3rd TotalEnergies, Eni, and Qatar Energy all applied for second round licensing on 2 quality blocks in Lebanese waters. 4 days after that, Palestinian political and military organization Hamas launched coordinated multi-pronged attacks by land, sea, and air against Israel. Hamas has controlled most of the political realm since the party won the Palestinian legislative election on the manifesto “armed resistance to end the occupation.” This is of course in reference to Israel. The attacks spanned across the border and even ended up coming to a music festival where Hamas slaughtered over 260 festival goers. From there Israel has responded with several airstrikes on cities within Palestine and declared they would be besieging the city of Gaza as ordered by Israel’s defense minister. That is essentially what the big events have been over the weekend. So how does this tie back to the originally mentioned Lebanon? Well, is a significant member of the Iran-dominated Shia Crescent of Power, which China and Russia have seen as a very important transportation vessel for their expansion of power across the Middle East. Lebanon’s political and military organization is called Hebollah. They are also heavily against Israel and their control of power, as you may have guessed by religious differences. If you follow the chain of command it turns out Iran ranks above both Palestine and Lebanon and provides financial and military support. This could also explain why Iran has been refusing inspections of their nuclear facilities in recent weeks. Not to say they could have weapons, but to say they have been planning this coordination for quite some time and not interested in having anyone involved in their affairs. So I’ve laid a hefty political, geographical, and religious foundation. What does this have to do with oil? Well, the last time there was a significant conflict between Israel and several Middle-Eastern states we had the oil embargo of 1973 where the price of oil shot up from $3 per barrel to $11. I can already hear you saying, “But this doesn’t concern the US at all… wouldn’t this dampen the effect of a full blown conflict?” Well unfortunately, we are already heavily involved in supporting Ukraine, which is fully against Russia, which is an active stakeholder in supporting the Middle East against Israel. You can kind of see where this is going. Perhaps not a full World War, but a Middle-Eastern and European conflict that draws in more and more actors. Depending on the outcome, it could very easily adjust the way the oil market operates, and I can almost guarantee that it wouldn’t still be traded on the dollar. Iran backed conflict is about the worst thing that could happen at this moment, and I think some very dramatic price shocks are right around the corner. Sobering news for sure, but this could have major implications for global oil markets.
But folks that is all we have for this episode. Potentially scary news, but we will keep you posted on how it develops. If you are looking for more content before the next episode airs, head over to www.rarepetro.com. Plenty of written, audio, and video content for you to peruse through. If you are looking for news we push plenty of stories from many of our favorite sources. We enjoy digging into all aspects of energy, so thank you for taking the time to join us and grow your knowledge. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!