Conflict in Eastern Europe escalates to invasion, fears of energy scarcity, and China stockpiling valuable commodities.
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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 last day of February 2022. Russia’s invasion of Ukraine commenced last week, and I’m sure this isn’t news to anyone listening. While there are certainly plenty of interesting things to analyze with that conflict alone, I will be doing my best to focus on stories that pertain to energy in some way. This is in fact the RARE PETRO podcast rather than the RARE CURRENT WORLD EVENTS podcast. Without any further ado, we will begin with commodity prices.
WTI prices got a little bit excited on the announcement of international conflict and ran all the way up to $100 a barrel before settling back down to about $92.50. The last time WTI was at $100 was way back in 2014 when the price was actually taking a trip downwards to where it would eventually become $50 in 2015. The price is already down a little bit from when markets opened this morning as the price sits at $94.69, but it looks like $90 is the new floor for at least the near future. The spread between WTI and Brent has once again widened as Brent is currently $100 and topped out at about $105. Most of this is a result of the conflict between Russia and Ukraine as lots of vital energy infrastructure and just energy resources in general are at stake. Natural gas is the strangest of commodities out there. Last week we saw sustained cold temperatures in the US and more importantly an invasion, but natural gas is now lower in price than just before the conflict started. It was at about 4 and a half dollars before, peaked at just shy of $5, and is now down to $4.40. This could change in the near future depending on energy sanctions, but we will talk more about that if it reaches that point. Basically, both WTI and Brent are up big.
Next is the rig count. This metric has been performing very well this year as we’ve seen double-digit increases multiple times. This week is not one of those weeks. A meager 5 rig increase is nothing exceptional, but still movement in the right direction. The Permian finally sees a little bit of competition this week as the Haynesville steps up to match its 3 rig increase despite having 5 times fewer rigs overall. The Cana Woodford increased its total by 2 rigs, and the Mississippian pushed its own total up one. The only major basin to lose rigs was the Granite Wash which dropped 2 bringing its total to 3. State by state we saw Texas as the winner with 4 rigs (surprise surprise) while Louisianna, Kansas, and New Mexico all tied for second with one rig each. Oklahoma lost itself 2 rigs on the week. Of the wells being drilled there will be a slight emphasis on gas plays rather than oil. The offshore environment saw no change.
Lastly is the inventory report. Trust me, this is much more enjoyable to read on Thursdays on www.rarepetro.com when it is released as the Thirsty Thursday report. Plenty of awesome visuals from graphics to just goofy photos. Not only that, but you also get the opportunity to grow as a mixologist as we feature a new cocktail every week. Who doesn’t want that? Here’s the barebones details in case you missed last week’s report: The EIA predicted a build of 442,000 barrels which would have been smaller than last week’s reported build. The actual build was closer to 4.5 million. If that sounded like a lot to you, hold on to your socks. The API predicted a slightly larger build of 767,000 but also fell short as the actual build was much closer to 6 million. Despite large builds like this, the US domestic crude inventory is still below the historical 5-year range. Current events in Eastern Europe may even increase the world’s demand for US commodities. Russia is the third-largest energy producer, and sanctions against its energy resources will only make the energy crisis in Europe even worse. Gasoline continues its downward trajectory to lower than historical ranges. This week’s draw was only about 600,000 barrels, but it certainly still had an effect on gas prices. Gasoline is up 2.1 cents from last week and it is possible that this invasion in Ukraine will force domestic prices even higher. Again, Russia is a huge player in the world of energy, so sanctions against their energy are going to drive the cost of energy up worldwide. Let’s hope that this doesn’t cause gas prices to skyrocket domestically to the point where rationing is introduced. Propane has been skirting the border, but distillates continue to fall lower and lower outside of the historical range. Again, it is likely that these inventories could be drawn on more aggressively should sanctions be implemented.
But that is all we’ve got for our statistics! Time to get into those news stories I know you all have been waiting for. First I think we should talk a little bit about sanctions, a powerful tool that the US has rarely shied away from using if the opportunity presents itself. At present, the biggest sanctions against Russia are mainly economic. You know, freezing accounts and limiting business transactions. While this is a great way of choking out war efforts, a more direct way can be sanctioning energy the energy that the country produces. After all, most world “superpowers,” as I’m going to call them, usually have access to a whole lot of energy and make loads of money selling the stuff. Unfortunately, Europe is caught in a bit of a bind. A lot of the energy that they consume (natural gas especially), is sourced from Russia. If countries were to agree to sanction energy Europe would see its already record-high energy prices spike even further. A real catch 22 situation. Countries like Germany are even finding themselves dependent on Russia’s resources after decommissioning nuclear facilities and relying on more natural gas. This is how it would all function in a perfect black and white world, but now that banks and rich oligarchs are being sanctioned, it is starting to impact energy sales. Banks aren’t exactly able to provide letters of credit to guarantee that oil deliveries will reach their destination which is driving nearby countries mad as an $11 barrel of Russian oil taunts them. Russian oil companies are struggling to process payments which prevent any traders from making confident transactions. So, while sanctions haven’t exactly targeted energy, the industry is reacting as if they did. This is a problem for Europe as we have mentioned, but also a problem for the rest of the world which is already struggling with high energy prices. American energy prices will go up if the US exports more energy to service demand that Russia used to be responsible for. American energy might just reign king at the end of this conflict which is really not a great thing in the long run. Russia produces a massive amount of energy and many countries are dependent on it. If anything, this conflict is drawing attention to energy independence. Being able to produce your own energy limits insane price shocks should any imports be disturbed. Unfortunately, countries like Germany are using this as an opportunity to double down on renewables, or “unreliables.” The country has used this conflict as a way to argue that the goals are not aggressive enough and fully renewable energy generation should be achieved by 2035 rather than 2050. It makes you wonder how Germany will obtain its energy should it experience a shortage. Either way, Russia is guaranteed to have an economic effect on most of Europe through energy supply disruptions. They are walking out of this conflict with more new enemies than new friends.
I’d also like to visit one more story that isn’t entirely focused on the current conflict between Ukraine and Russia. Putin met with Xi Jinping early last month and China accelerated its purchasing of Russian crude. Whether or not China knew about the invasion, this stockpiling is a direct middle finger to the United States which is urging everyone to release oil from their strategic reserves to limit the increase in rising commodity prices. The Biden administration really started pushing this idea in November, but it has seen no luck thus far. While China continues to stockpile in hopes of taking advantage of even higher prices, Biden has mentioned that the US may just dip into its strategic reserve to prevent energy price increases. Imagine that. The middle East, China, and Europe holding onto a very valuable commodity that increases in price while the US is eager to unload as much of the stuff as quickly as it can. I sure hope we don’t see another SPR release. I want to keep those salt caverns full and untouched until conflict breaks out on American soil. I’m sure China is pleased with these prices, but I wonder if they will start unloading any time soon. That, or they have hundreds of millions of barrels of a valuable commodity should the world economy falter.
I know these episodes have gotten to be a bit high-octane lately, but invasion and subsequent war tend to do that. Be sure to follow this podcast so that you are on the cutting edge of energy knowledge through this unique period in history. Also, follow us on LinkedIn so that you don’t miss out on our other near-daily content. If you have any specific questions, feel free to email me at podcast@rarepetro.com. This has been Tavis Kilian with RARE PETRO, and until we see you next time: take care, everybody!