The best of times or the end of times?
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another foreboding episode of Monday Madness on February 14th, 2022. Yes, I used the word foreboding. Happy Valentine’s day and congratulations to the Rams but we have to talk about markets and I’m just going to launch right in straight away.
Natural gas is on the back burner today (no pun intended) because we will be focusing on crude prices. WTI peaked this morning at $94.60 with Brent maintaining a narrow $1 lead. I mentioned a pattern of peaks running through the last year and we are at a very pivotal moment. The line that runs across all those peaks is touching this point in time at $93 prices. I think we are going to see aggressive price movements either up or down. Down as that is exactly what the pattern has predicted the last few times, or up if a Russian soldier so much as sneezes in the direction of the Ukrainian border. Even so, all markets are entirely out of whack regardless of how oil performs. I had my eye on a house in Bakersfield that was already way overpriced, and that price went up another $30k overnight. This is supposed to be one of the last few safe havens of affordable living in California! The feds revealed that inflation at the end of last month was up 7.5% year over year and that is after they have massaged the data by removing energy, housing, and other rather significant factors. Some folks estimate that the raw number is close to 15% on the year. The stock markets have been mostly setting records numbers with small hiccups announced with every variant, yet these hiccups make the crash of ‘08 look like a single bad day at the casino. Even if the common man doesn’t concern himself with real estate, investing, or CPI factors, he is aware of the growing food prices that are a result of supply shortages and worldwide inefficiencies bred through COVID. Even though his wallet is taking bigger and bigger hits every trip to the grocery store, his wages have (statistically) remained stagnant. Unless he got a 15% raise last year, our hypothetical friend is losing money. This is causing what some have called “the great resignation” as more and more employees strike for more money, unionize, or simply quit their jobs, further straining existing inefficiencies. There is lots of writing on the wall hinting at stormy seas ahead, yet we seem incredibly focused on some rather trivial things. Environmental activism becomes less of a priority when the food budget becomes too small. I know it sounds grim, and I hate to perpetuate it because every other news network has already beat me to the punch, but I think the cost of energy is going to outpace this already insane inflation. RARE PETRO has been predicting $100 oil for quite some time now. You can go back and read our periodicals from 2020 justifying why we think so, and it is playing out the way we expected. Lack of investment and tighter supplies, but more on that after we finish out the rest of our statistics.
Next is the rig count. It looks like people are trying to capitalize on the current prices because we are now up 22 rigs from last week to a total of 635 which is 238 more rigs than we had this time last year. The last time we saw a build of 22 or more rigs was just over 4 years ago at the beginning of February 2018 when 29 new rigs went up. It looks like capital discipline is waning and some companies are excited to get back into producing. The Permian is at the center of the new frenzy with 7 new rigs followed by the Eagle Ford with 4. Then it is the Williston with 3 and the Marcellus with 2. The Ardmore Woodford, Arkoma Woodford, and Barnett each gained a rig as well. This puts Texas up 13 rigs as a state with the next highest change being at three. Somehow both West Virginia and Lousiana found a way to lose a rig each. These new rigs are mostly making horizontal hole and targeting oil. The offshore environment saw no change.
We will wrap up statistics with the inventory report which was posted last Thursday on www.rarepetro.com as the Thirsty Thursday inventory report. If you didn’t get a chance to read it, here is what you missed: The EIA predicted a build of about 370,000 barrels. Real simple stuff. The actual result was a draw of almost 5 million barrels! The API made a similarly small prediction just shy of a 700,000 barrel build but reported a draw of more than 2 million barrels. This builds on last week’s surprise build and follows with our prediction. We predicted that tight spreads would lead to other countries likely importing more American crude, especially during the energy crisis in Europe. This implies a growing demand for American crude for the near future. This brings oil further below its historical 5-year range and has sent prices back up. The EIA’s inventory report could not have come at a better time. Gasoline inventories have declined in the past week which is a little bit earlier than anticipated. The 1.6 million barrel draw leaves the current inventory level 3% below the 5-year average. Since gas prices were going up while we were adding millions of barrels to the inventory, nobody should be surprised that it went up even more on the news of a draw. The average price for gasoline went up another 6 and a half cents per gallon on the week. While the inventory levels definitely played a part in the price, a bigger factor is definitely the skyrocketing cost of oil. WTI hasn’t been above $90 a barrel since 2014, and now prices are up all over the country. Gas prices in Florida are quickly climbing as they reach new 8 year records. Propane is fine, distillates are not. We are now quickly losing distillates at a time where there should be little to no change in the inventory level, if not a build. We anticipate losing even more between March and July so let’s just hope things don’t go from okay to bad too quickly. This is not a problem unique to American markets. European and Asian markets are experiencing the same tightening inventories. Things aren’t bad yet, but you will definitely want to keep your eyes on distillates for the near future.
But that wraps up our statistics and primes us for this week’s news. It’s time we talk about banks that are now providing billions of dollars in funding for oil and gas companies despite every energy organization pointing towards our goals of a green future. It runs out that companies, banks especially, are in it for profit. They never cared about pride, BLM, or the environment despite putting out ads claiming they did. I’m more surprised that people are surprised that banks are investing in conventional energy, especially at this time. I think they are going to make quite a bit of profit. Last year 25 of the world’s leading banks collectively provided $55 billion to energy companies looking to expand on production. The IEA is pointing out that their estimates said they can be no more investment in new oil and gas projects to maintain a 50% chance of capping global warming targets, but the banks don’t seem to care as the alternative involves investing in renewable energy which seems to be generating fewer and fewer returns as time goes on. Hell, even the retail consumer is seeing fewer benefits. Energy here in California is getting so expensive that utility companies are adjusting their rates depending on the time of day. Now folks that used to pay nothing because of their solar panels are back to paying electric bills like the rest of us, although it may not be as large. How can we expect companies to invest in the projects if they expect to lose money? Now we have organizations like ShareAction, a responsible investment non-profit organization, who is calling on investors to demand their banks implement policies to restrict finance for oil and gas expansion. It is only a matter of time until some companies give in to the cries and please of investors who dream of a greener future, but all this will do is further blur the line between activism and investing. I for one, have no problem banking with an organization that is funding oil and gas projects, especially because that makes me feel more secure in my money being backed by something. It is foolish to think banks will stop funding conventional energy because at the end of the day… someone has to back the project, no? This is a commodity that isn’t going anywhere immediately.
In a sort of piggyback story, supermajors have reported their biggest cash flow since 2008, so you can understand why banks are still backing conventional energy. ExxonMobil, Chevron, BP, Shell, and TotalEnergies booked a combined $37 billion in cash flows for Q4 of 2021. Still, they haven’t lost their minds to greed. As BP’s CFO said, “For now, I’m going to be conservative and manage the company as if it’s $40 oil. Anything we could get above that just helps, obviously.” I like seeing this type of discipline because it will prevent a situation of rampant overproduction that initially tanks an otherwise very attractive commodity price. Still, everybody wants a piece of the pie and the EU is looking to companies like Shell and BP. They want them to pay a “windfall tax” that could ease the blow to consumers from record energy prices. A windfall tax is used to target firms that were lucky enough to benefit from something they weren’t responsible for. It is argued that high energy prices were something that supermajors were not responsible for, but you can see how that justification gets very murky and gray. Who is at fault for the high energy prices? Should energy firms subsidize the common man? Bernard Looney says, “if anything, the UK needs more gas, not less gas right now. And that’s going to require more investment, not less investment. And a windfall tax isn’t probably going to incentivize more investment.” He has a point, and I think that quote right there perfectly sums up the precocious situation in the EU. Let us hope that the same thing does not find its way into the US.
But folks, that is all we have for you. I again apologize for a rather gloomy episode. We like to bring you the news that is uplifting and positive, not depressing and scary. At the end of the day, the folks who do work in the energy industry will benefit from these high commodity prices, so there is good news in that. Just sucks that it might come at the cost of an economic crisis. If you do want to listen to a more positive lesson, I encourage you to check out www.rarepetro.com where there is plenty of other content to read up on, most of which that is much more positive. Other than that you can send all of your questions about energy to podcast@rarepetro.com. This has been Tavis Kilian with RARE PETRO, and until we see you next time: take care, everybody!