In this episode Tavis covers a significant rig decrease, how to skirt EU sanctions, and Russia’s blooming friendship with India.
CLICK YOUR PREFERRED STREAMING PLATFORM TO LISTEN TO THE PODCAST
Audio Transcript
Alrighty everyone, welcome back! Excited to be back here for Monday Madness! I’m back to a clean bill of health today after closing out last week with a bit of sickness. It was strange to be sick in a time after 2020 where things have almost gone back to normal. In 2020 you would cough in a grocery story and everyone would look at you as if you had just spit onto the produce. Now, you have a little sneeze in public and no one even offers a second glance. Change is the only constant, and there is surely plenty of change abound in our world. But you didn’t come here to listen to some guy on the internet talk about the sniffles, you came for the biggest news and most revealing statistics within the world of energy.
Lately I’ve been starting each day with a quick check of commodity prices and I can’t be sure whether or not that is a good idea. WTI finished out last week above $75 and peaked as high as $79 on Tuesday evening. This week we opened at about $73.50 and I have no idea where the price is going. Markets seem to be wholly disconnected from what is going on in the world and for some reason the price of the valuable energy commodities is decreasing. Natural gas somehow prices out to $2.40 per mmBtu. Last time natural gas was that cheap was in August of 2020. This greatly contests the high of $9.680 from August of 2022. It’s hard to be sure of the movement, but you best believe you can be sure of the volatility. The sell off since mid December has been less than kind to anyone who opened up any long options on natural gas. Brent is back to an $80 barrel as the spread between Brent and WTI spreads to about $7 as it grows little by little with each coming week. A $7 spread isn’t too bizarre, but fun things start to happen in the $8 territory as more people opt to import cheaper WTI. Overall everything seems to be selling a bit under what it is worth, but I won’t complain about a $73 bbl after years of much much lower prices.
Next up is the rig count. Last week I went on about a seeming plateau. Unfortunately, I may have jinxed us because we last 12 rigs from the last total. The last time we saw something close to this was the 11 rig decrease back in the beginning of September 2021. This leaves us at a total of 759 rigs which is still 146 more than we had a year ago. You don’t see a lot of change across major basins. The Permian posted a 3 rig loss and the Granite Wash dropped 1. Otherwise not a whole lot happened. If we look at the state level, we see a big drop all across the country. Texas and Wyoming were both down 3, California lost 2 rigs, while Alaska, California, Colorado, Louisiana, and Utah dropped 1. The losses even extend to the sea as the Gulf of Mexico lost a rig. This seems like one of two options. It is possible that a small loss happened to line up for all of these territories. The data, however, tells a different story. We’ve sort of plateaued the rig count for several months, and commodity prices are only decreasing. Keep an eye out next week, because a rig decrease of a similar magnitude could change from a one off, to a bearish attitude surrounding new exploration which is already incredibly restricted from a CAPEX perspective.
Our last statistic to touch on is Nick Fernhout’s week;y “Thirsty Thursday” piece. It’s a boozy and fun weekly written post on www.rarepetro.com that does an excellent job looking at domestic commodity inventories and what it might signal for national and international markets. If you missed it, here’s the barebones to get you what you need to know: This week’s crude oil inventory data from the EIA shows an increase in stockpiles, with a rise of 4.14 million barrels. This is higher than the expected build of 0.376 million barrels, pointing towards a decrease in the market. With a higher inventory, prices could potentially face downward pressure. Data from the API also shows a build, although they expected a draw of 1 million barrels on the dot. This deviation from expectations could indicate a shift in the demand and supply balance and have an impact on prices in the near term. It’s important to keep in mind that the API data is a preliminary reading and the more comprehensive data from the EIA will provide a clearer picture of the market. For the second week in a row, there is no change in SPR stockpiles. Gasoline is headed in the opposite direction of natural gas, and oil. For the past month or so that relief from high summertime gasoline prices has been wearing off. I wouldn’t worry too much about that happening again, however, in the meantime, it may mean paying a bit extra to fill up. With refineries still recovering from cold snaps across the country and maintenance, we may be in for a few more weeks of slight gas price increases. The national gasoline average is $3.498 per gallon, which is actually down $0.003 from the previous week. So while there is a general increase in price over the month, this week remained relatively flat.
Thanks again to Nick Fernhout for putting content together on that section. Next up we’ve got some news stories to address. This first one was sent to me by Anthony McDaniels. India is now paying for Russian oil in dirhams, the currency of the UAE. This only builds on our recent emphasis on the weakening petrodollar, and dollar in general. India has demonstrated that it has no problem consuming Russian oil despite outcries from several of its neighbors, yet it still wants to protect itself against the many measures imposed all over the world to avoid further sanctions. At this point, Indian traders and refiners worry that they will not be able to continue to settle trades in dollars, especially with the EU’s price cap rule hence why they started trading in dirhams. This is essentially like going to the grocery store, handing the cashier your mastercard, and then saying “I’m sorry it is illegal to use that card here” for you to just quickly hand them an American Express card instead. Sure, that metaphor is an oversimplification of currencies and commodities, but it highlights the total ineffectiveness of a ban. Not allowed to buy a barrel of Russian oil for $80 due to a $45 price cap? Just pay for it with $80 worth of any other currency and you are technically not violating anything! This has the added benefit of allowing Russia to get further away from the control of the dollar. A sanction is useless if a barrel is traded in anything else. Personally, I am upset with the EU’s decision because this could be one of the most pivotal landmarks for the petrodollar as other countries continue to trade in anything else. It only makes our dollar that much weaker, and I would argue that much of the world loves to see that. I can only assume other countries are scrambling to set up international accounts that allow them to convert currencies and mimic the genius of India. The line has been drawn in the sand for quite some time now and people are being forced to pick a side. It seems like more and more folks are picking the side that detests the petrodollar.
This next story sort of builds on that last one. Russia, Iran, and India are working together to develop a transport system that mixes rail, road, and water routes to reduce transportation costs and afford free operation without European sanctions. The foundation is already there as we discussed in the last story .All of the EU’s pushing really just ended up pushing Iran closer to the BRICS developing countries, and you can’t quite blame them. Why play by stupid rules when you can create your own markets? Still, growth won’t be immediate as they are building on small capacity systems that run over rough terrain, but the story could be different in as little as 5 years. This could build lots of commercial benefits for middle and Eastern Europe which will only grow alliances in the area. If that is the case, why would anyone continue to trade on the dollar? Because the US and western Europe asked them to? Fat chance. It hasn’t worked yet, and I don’t see it working soon. The article that Anthony shared with me regarding this topic has an excellent quote. “…the EU policy of tightening the screws on Russia is a policy win, but the unintended consequence is that Europe is effectively importing inflation to its own citizens.”
Folks, I think that sums up the world events well. The EU aimed to restrict oil sales from Russia to decrease their revenues generated from energy. They certainly did so in Western Europe, but hydrocarbons are a requirement for healthy thriving economies so they had the “unintended consequence” of weakening the petrodollar and boosting international trade for Russia to other countries. Just because the government means well with policy does not guarantee things will proceed as they expect. The EU may have crafted a policy that begins the downfall of the petrodollar, and they had no idea.
I know it sounds doomed, but we really aren’t. The dollar is so entrenched in energy markets that there won’t be a change overnight. We might see things evolve through the remainder of the decade but we aren’t a year out from living in shanties and burning dung for cooking fuel. It is important to stay up to date on these things as they influence many aspects of your life. We love to research this stuff so all you have to do is hit the follow button on whatever streaming provider you are listening through or just find us on LinkedIn or www.rarepetro.com. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!