High energy prices, a call for less natural gas, and energy shortages.
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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 the 21st of February, 2022. Life comes at your quick and keeps you very busy. Often times you look for a reason to make some change or start something else in your routine. It is really easy to say, “Well I will just wait until I buy that piece of equipment to get started,” or “I’ll definitely start next week. For sure next week.” Circumstances aren’t likely to be fine, and are certainly never going to be perfect. Lately, I’ve been talking to a lot of other young folks who have said that they want a certain type of change. I myself have wanted to get back into distanced running. Don’t wait. Take that jump! Make that move out of the midwest to find something you like. Get out of that industry that you really don’t like and go to law school. You are in control of your future, and I’m sure we are all capable of great things. But I know you didn’t come here for daily motivation! That’s just a nice side benefit of this podcast. You came to here to learn about our favorite statistics and stories within the world of energy. Let’s get into it!
Of course, we’ve got to start off with commodity prices. WTI is doing its best to tread above $90 and so far, has been doing very well. In the past week, we saw prices top $94 twice, but they quickly dropped back down. This morning prices started out at about $90.5 and have since climbed above $92. Since tensions remain between Russia and Ukraine, and since world demand for crude continues to increase as the world lifts all mandates, the price is likely going to remain in this territory for a little bit longer plus or minus 10 dollars. I would love to see oil break $100 because it would be a momentous occasion, but I would also hate to see oil break $100 because it would only further exacerbate inflation which is already at tremendous highs. Natural gas had a great week as it climbed from $4.20 all the way to $4.75 this morning. Of course, it still has a long way to go if it wants to top the $5.50 peak from earlier this month, but it is definitely possible especially if the US needs to service more of the world’s natural gas needs. Unfortunately, new regulations may threaten our ability to do that and further support Putin’s exploitative energy strategies.
Next up is the rig count. At this price point, we are likely to see many many more rigs go up as people look to capitalize on increased prices, or be ready to meet demand should prices go up even more. The most recent rig report shows that the US is up another 10 rigs bringing the total to 645 which is 248 more rigs than we had this time last year. The Permian is way ahead of the pack as they continue to add way more than everyone else, despite having more than 300 rigs. The Permian is up 5, and the Haynesville is up 2. Most other basins are up by one or 2 or even saw no change. The Mississippian and Utica each lost one. This brings the Mississippian back to 0. State by State texas is up 8 rigs with the next best being New Mexico and Colorado at 2. Very happy to see more activity in Colorado. The big change here is the offshore environment. The gulf of Mexico dropped 4 rigs bringing the total from 16 to 12. This is probably the largest drop we’ve seen in the offshore environment in about 1 year. All of these new rigs are drilling horizontal wells that will be targeting a pretty equal split between oil and gas. Don’t let the offshore detract from the fact that the land-based rig count was up 13! That is certainly something to be happy about.
Lastly, we must look at the inventory report. As always it is much more enjoyable to read this each Thursday on www.rarepetro.com as it is released as the Thirsty Thursday inventory report. In case you missed it, here is all the important information: After 3 weeks of growing builds, the EIA seemed to notice that things would slow down and ended up predicting a 1.5 million barrel draw. Unfortunately, they went the wrong way and the resulting build was about 1.1 million barrels. The API also expected a similarly small drawdown of about 1.75 million. They witness a draw of about 1 million barrels, unlike the EIA. Even though no one is especially excited to see a build, one must keep in mind we have witnessed more drawdowns than builds in 2022, so this year is not off to a terrible start. Also, recall that this time last year the inventory levels were at the upper boundary of the 5-year range. Now the line has busted through the lower limit to set new records. Imagine what would happen if this trend continued for another year and we cleared another 80 million barrels from domestic inventories. Gasoline inventories continue the earlier than anticipated fall and lose another 1.3 million barrels. This leaves the inventory at a new 5-year low for the time period, although the passage of time should be all that is necessary to push this back into the regular territory. Again, a decline is expected soon but this happens to be a little bit earlier than usual. Nothing to be alarmed about yet. That being said, you may want to be alarmed about gas prices. Although the increase in price has been slowing gas prices are still up another 4 and a half cents per gallon from last week. As oil gets more and more expensive, gasoline follows as it is a derivative of crude. Propane has just tiptoed outside of its regular historical range, but the spotlight is once again stolen by distillates. The domestic inventories have declined once again and show no time of trending upwards until May. Until then we can count on more expensive jet fuel and delivery of products only further exacerbating inflation.
But that is all that we have for statistics. Time to get into the new pipeline regulations I was teasing at. In the past, the Federal Energy Regulatory Commission (FERC) has been accused by environmentalists of rubber-stamping pipelines and terminals without much consideration for the environment. The new considerations for landowners and environmental justice communities are being praised by many democratic leaders, but Republican Senator Joe Manchin called the move reckless stating, “The Commission went too far by prioritizing a political agenda over their main mission — ensuring our nation’s energy reliability and security. The only thing they accomplished today was constructing additional roadblocks that further delay building out the energy infrastructure our country desperately needs.” Now 3 years ago this claim could have been easily brushed off, but today circumstances are very different. Energy costs are skyrocketing, and government bodies seem to be crafting an environment that does not encourage new conventional energy projects. Democratic Commissioner Allison Clements upholds that these policies are for the best as she claims, “[They call] on the commission to consider market trends as well as policy and regulatory developments affecting the need for the project, currently and into the future.” This is true. The new regulations attempt to work in tandem with a future of more renewable energy, but it seems that everyone is forgetting one key prediction from the EIA. Natural gas use is imperative for the energy transition and it is estimated that the world will be increasing its use of the energy-dense vapor by about 40% from 2019 levels. If anything, this will just make much-needed natural gas way more expensive. These regulations are certainly something to keep in the back of your mind should energy get more expensive which is especially likely considering the rest of the world is struggling to produce at pre-pandemic levels.
In addition to the FERC rules, the Biden administration is once again flexing its political power. On February 11th, Judge James Cain Jr. of the US District Court for the Western District of Louisiana ruled that the Biden administration’s calculations “artificially increase the cost estimates” of drilling new wells. The ruling came after 10 states sued the government for preventing them from developing energy resources on federal land that would bring much-needed income. Despite the judge’s ruling, the Biden administration came out swinging with a big announcement on Saturday: indefinite freezing on decisions surrounding new federal oil and gas drilling. This is just the latest development in the federal land kerfuffle. It started when Biden announced the federal drilling moratorium soon after taking office. Then a different Louisiana judge ruled in the favor of energy-producing states forcing the Biden administration t watch as 80 million acres in the Gulf of Mexico were opened for bidding. Then, environmental groups sued to block that lease sale in federal court and won. This has to end somewhere, right? Can the president continue to make executive orders despite two different judges overruling the decisions? Can environmental groups continue to sue on the grounds of environmental justice despite the US having very little legislation identifying and quantifying exactly what that means? Don’t get me wrong, RARE PETRO believes in being good stewards of the environment. We also believe that one can be environmentally mindful while still consuming hydrocarbons. The lack of consideration for anything that is not environmentally related is concerning. Skyrocketing energy costs could make it difficult for families to put food on the table as everything gets more expensive. I would argue that is a much more immediate problem than lowering carbon emissions by 2050 by absolutely canceling all natural gas projects despite the need for it during the energy transition.
But hey, there are conclusions you will have to draw yourself. Our job is just to present the information. That is the end of this episode, and I encourage you to go to www.rarepetro.com to find more great information regarding all things energy. As always, you can reach out to us at podcast@rarepetro.com for any questions you have about energy. A Ms. Christina Shelton reached out to ask if RARE PETRO had any literature on biofuel from a dairy and swime perspective. While we do not at the moment, this is certainly a subject that RARE PETRO will be researching so be sure to follow this podcast and follow us on LinkedIn if that topic sounds interesting to you! This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!