Monday Madness: Feb 27 ’23

Posted: February 27, 2023

Tavis talks about the resurgence in natural gas commodity pricing, a dicey Pemex situation, and Russia’s determination to make the most out of a barrel.


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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 February 28, 2023. I know February is a short month, but it feels like we are absolutely racing through 2023. Perhaps it’s just the way things go as we get older ourselves, or perhaps it is the exhausting news cycle that seems to spin up headlines faster than you can say “World War III.” If it’s not that, it’s a chinese spycraft, ufo, train derailment, or infrastructure centralized explosion. At this point I can’t be sure if algorithms have hit the engagement jackpot or if industrial nuclear fires are just that frequent. The more I talk to folks around me, the more it seems to be a blend of both factors. It really feels like we have worn out the terms “unprecedented” and “once-in-a-lifetime” in the 2020s, and we are just over 3 years into the decade. But enough focus on the negative! This isn’t the RARE PESSIMIST Podcast, but rather the RARE PETRO, so let’s redirect our attention to stories and statistics within the realm of energy starting with commodity prices.

Last week WTI swung about as high as $77 per barrel to as low as $74. The movement was quite dramatic and volatile with multidollar movement in a matter of several hours. It finished the week on a high note (high relative to the weekly lows that is) and opened up this morning around 76 bucks. Unfortunately, early movement has been primarily downward, so we may see price activity relatively similar to last week. The $80 ceiling may not be as close as you expected, but ultimately, it is not that far away either. Brent maintains a steady $6-7 premium as the spread holds relatively constant with identical price movement. For some unknown reason natural gas has decided to increase in price after reaching a price of less than $2 (albeit very briefly) for the first time since 2020. Since then it has absolutely blasted off climbing as to where it sits now at about $2.70. Keep in mind that movement like this is not guaranteed to continue for any given amount of time, so it could be just as volatile in the other direction. Either way, this price movement makes much more sense to me, so I am not exactly sure as to what served as the catalyst for the increase. Ultimately we have a relatively stable oil price and a predictably volatile natural gas price, and I personally am excited to see what movement we can witness next week.

Next up is the rig count. Unfortunately we are looking at a 7 rig decrease leaving us with 753 rigs which is still 103 more rigs than we had this time last year. The largest losses by basin were found in the Granite Wash and Haynesville which each lost two. Otherwise the Arkoma Woodford and DJ lost 1 rig each. On the bright side, the Ardmore Woodford, Cana Woodford, and Permian each gained a rig. State by state statistics show that only one state is up, and that state is Pennsylvania with a 3 rig gain. Colorado is down one. California, New Mexico, and Oklahoma lost 2 rigs each. West Virginia brings up the rear with a 3 rig loss which is a 20% decrease for them. The laid down rigs were mostly tasked with drilling horizontal oil wells. Not an excellent count, and it certainly seems like we have leveled out from the rebound response to 2020.

Lastly of course is the inventory report from Nick Fernhout. He posts an excellent analysis complete with visualized data and a lovely cocktail recipe each week to, and I highly recommend that you give it a peek. Here is what you may have missed: You won’t need to even read this report soon with all these builds! This week it’s a 7.6 million barrel build according to the EIA, I wager next week we see an 8.3 million barrel build. Yes, we are back to Nick making bets on oil inventory data. So come back next week to see if I hit on my bet! The API reported a somewhat higher build than the EIA at nearly 10 million barrels. While both builds aren’t quite as large as last week, they are still quite a decent size when compared to several months ago. When will the first draw happen? After more than two months of straight builds the market seems due for a draw. The main reason behind the 60 million barrel cumulative build this year is reduced refinery output, stunting the volume of oil than can hit the market. Nothing new on the gasoline price front, they’re still relatively flat, slightly down on the week. Gasoline stocks on the other hand have finally changed direction, they have crested the peak now and show signs of declining. If the 5-year range is to be trusted we can expect gasoline stocks to drop for a while now. National gasoline prices are down $0.003, nothing to get excited over. Hawaii, California, and Nevada are all up there with the most expensive gas in the country. Colorado is making its case though and if the refinery here in Colorado doesn’t get back online soon we may take over the lead in a few weeks. Diesel dropped 7 cents this week! At this rate, we’ll reach last year’s normal prices in a few years… If rising distillate stocks are going to continue on their path we may indeed see deisel cheapening at a quicker rate. Propane/propylene remain in their 5-year range.

Thanks again, Nick. Great report. Now we move along to our news stories. It has been a while since Pemex has been discussed on this podcast, so it is unfortunate that it returns in a negative light. If you’ve been tuned into the news, you may have heard about a refinery fire or two… or three. That’s right, 3 refinery fires last week that resulted in many injuries and two deaths. To add a comical insult to injury, they just released their Q4 2022 results which reported $9.4 billion in losses which was triple the previous quarter. This does not bode well for Pemex who has had declining oil output for 3 years in a row now. At this point you might be thinking, “Hey, at least it can’t get any worse!” and I would be inclined to say that you are in fact wrong. Their debt climbed to $107.7 billion at the end of 2022, and you can expect $8 billion maturing this year. In a time period where other large E&P companies are posting large profits and improving relationships to debt, Pemex has spent the years moving in the wrong direction. President Obrador highlighted Pemex and the potential it held for helping the country achieve huge economic growth and has somehow ultimately failed in that time despite throwing $45 billion in capital injections and tax breaks to the state owned agency. While these are all significant problems, they likely will not be addressed until current fires are dealt with, that being talks with Goldman Sachs and JP Morgan to offer financing for outstanding debt. I can’t be sure what type of deals they are striking up, but I can imagine that these banks may be gain more control than Mexico currently has, though “control” isn’t exactly a word you would find in the same sentence as Pemex. Time will show how they bounce back from these fires in an already tough financial spot.

Our next story revolves around Russia. They expect to add additional pressure to Western Europe through another announcement of production cuts. While Russia already announced a 5% production cut for the start as March, they are now considering further production cut up to 25%. Of course this servers to raise crude export revenues for Russia, but there is no guarantee the plan works the way Putin might want it too. Any decreased supply will certainly boost oil prices, but the benefit is not likely to be observed in the short term. Yes, they will be selling at a higher price, but potentially 25% less in volume. In my own personal opinion, this tells me that Russia is not looking to end its conflict with Ukraine anytime soon and needs to improve long term financials to make sure they aren’t just pushing all production westward for too small a price. Again, that is my personal take on the situation, though many news outlets claim it is more of a retaliation against sanctions from Europe. Whichever way you cut it, know that Russia lost $15 million in the last week of 2022 as the sanctions did push exports lower than at any other point in the year. I am quite surprised at the effect they are having, but there is still plenty of demand for Russian crude, especially at $60 a barrel. Keep tuned in because this is just the start of the year, and I think trade is only going to get much more hostile.

There you have it folks! Another episode of Monday Madness. Energy ties into every part of our lives. Consumption. Geopolitics. Investment. Transportation. Manufacturing. Technology. Science. Agriculture. The list could truly be never ending because it truly fits in anywhere. This is why RARE PETRO feels it is so important to stay up to date on current events where you can. It is a ridiculous world out there, but if we boil it down to data and history, we might be able to determine a few patterns and trends which could become advantageous in countless ways. Let us do the research. All we ask from you is to frac that follow button so that you don’t miss any of that aforementioned enriching content. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care everybody!


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