Make it or break it point for WTI, a hyperactive rig report, and Russia’s commitment to its Chinese ally.
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another enthralling episode of Monday Madness on February 7th, 2022. Do you know what is just as important as finding a passion? Finding good people to surround yourself with. People that push you to become a better version of yourself and celebrate your successes rather than growing envious. I believe it was Anthony McDaniels, the CEO of RARE PETRO, who once told me that he likes to do cool things with cool people, and by golly he is right. I had the pleasure of meeting up with a friend in LA that, like myself, has lofty goals for the future. It felt good to talk to another person my age about what we want to achieve in our futures and how we plan to work through it. I would like to give a small shoutout to Harrison Van Pelt and his organization, Unveiled Worldwide. They raise funds and give a voice to international communities by connecting different people across the world through the sharing of artwork and stories, and it is phenomenal artwork at that. I definitely encourage anyone to check out their socials. What about you, dear listener? Have you surrounded yourself with driven and like-minded people? Go ahead and reach out to those folks and express your gratitude and get regrounded in your goals. Find that north star and chase it, baby! But I know you didn’t come here to get an overwhelming dose of unbridled enthusiasm, you came here for the biggest statistics and news stories within the world of oil, gas, and energy.
We start it off with commodity prices. WTI broke through $90 last Thursday and has since stayed above, even peaking at $93 Friday morning. While we are experiencing a healthy amount of the Monday volatility, it really does seem like the new price floor is at least $90, if not $91. Between the wee hours of 4:00 and 5:00 AM Central time the price dipped below $91 but came right back up. I am hesitant to make any calls this early in the morning, but I am confident that we could see sustained $90 prices through this week. I hope you all held some oil positions from a few months back because you would be sitting on an easy little profit. Still, don’t let greed consume you. We are at a rather important technical test moment for WTI. I would argue that about 1 year ago we reach the first reasonable oil price once we got above $60. The steep upwards trajectory sort of leveled itself out and you see a much more reasonable trend. If you look back at a year-long scale of the price action, you see a rolling pattern on a 4 to 5-month time frame of big run-ups, and then big falls before repeating once again. If you run a line across all of the peaks starting at $65 in March, $75 in July, and $85 in October that line runs right up to about where we are now as we tease a $95. If I had to bet anything on the future, I believe that the price will hit $95, and some world event (whether that is a Russian invasion or another COVID variant) will shock this already very sensitive commodity and send that price down to $75 if WTI is worth less than Brent, or maybe only $80-$85 should there be a crossover between the WTI/Brent spread. Natural gas is not nearly as sexy of a story as it hasn’t challenged its peak from the September and October timeframe, but it still shows promise. The price was as high as $5.500 on Wednesday but has since cratered down to about $4.10 today. Folks, this could easily fall lower than $4 at the end of the day because a clear floor doesn’t exist, and if I had to guess, rock bottom under current market and world conditions would be at about $3.50 despite it still being winter. I wish there was more to talk about here, but I think being patient is the best bet.
Next up, the rig count. Another 3 rig gain in the US bringing the total to 613 which is 221 more rigs than we had this time last year. Normally a 3 rig increase is indicative of very little change, but we have an entirely different story this week. Basin by basin, we say that the Williston absolutely dominated as their rig count increased by 4 which is a more than 10% gain. Otherwise the Granite Wash, Permian, and Utica each saw a one rig increase. There were 3 other basins that lost rigs, but we have to get into the chaotic analysis of each state’s net change. Folks, I’ve been reading into rig count data since I was still enrolled in school, and I have not seen anything this hectic in years. The amount of change is huge, so I’m going to try to simplify this as much as I can. North Dakota and Texas: +3. Alaska: +2. West Virginia and Ohio: +1. California and Oklahoma: -1. Louisiana, New Mexico and Pennsylvania: -2. Even the offshore category lost 2 rigs of its own. Now, I totally understand why rigs are going up in North Dakota and Texas as they are home to some of the best remaining acreage in the US that is just begging to be tapped into at this $90 price point. I just fail to see why rigs are still coming down in places like New Mexico which contains part of the Permian. The most likely reason I can think of involves skittish bankers. In the past, the investment would have poured in as people looked to capitalize on this opportunity. Unfortunately, that burned a lot of people as some of these shale production portfolios have very early and steep declines. At this point, many investors (especially large banks) are asking that the companies they invest in just pay down their debt. Some of them even encouraged the companies to hedge into positions that are comparable with last year’s prices at and below $70. I’m sure they are kicking themselves in the foot now, but I think the money will flow if the $90 oil is sustained for more than a month. Still, a net positive for the rig count, and there are plenty of people staying busy.
Our last statistic to look at is the inventory report, which you could have read on RARE PETRO .com. We made some Superbowl punch and got amped up for the game while simultaneously running some technical analysis on how these inventories are looking and why. Here’s the barebones detail if you didn’t get the chance to read it: The EIA predicted a build that would be about 1.5 million barrels. This would have continued a 2-week trend of builds increasing in magnitude but fortunately, they were wrong. The resulting drawdown was just over 1 million barrels. The API predicted a larger build of 1.3 million barrels, but they too reported a draw, although it was slightly larger than the EIA’s at 1.6 million. This is a surprising reversal for both. Historic trends would suggest a build, and recent weeks would also suggest the same. Why didn’t it happen? It is very likely that this is a result of the Brent and WTI spread growing narrower. This encourages international players to buy more American crude as it is cheaper to refine even after shipping. Should the spread get smaller or even reverse, we will likely see a large increase in crude exports leading to continued draws. If you would like to learn more about spreads we encourage you to check the article we posted last week. ’m sure it comes as no surprise, but gasoline inventories are up once again. This week they climbed by 2.1 million barrels and are expected to level out in the next month before continuing downward. Things are starting to get rather concerning when you look at gas prices. We have built almost 30 million barrels of inventory back since December, but the price still continues to climb. The week-over-week increase is 6.5 cents per gallon. This time last year gas was only $2.431. While some states got to experience sub $3 gallons for a short period of time, the new minimum is Mississippi where you can find gas for $3.046. Propane continues to ride the fine border of the lower limit while distillates have fallen even further in supply. The world is seeing many problems related to this. Europe distillates continue to rise as global inventories drop. Asia distillate inventories are plummeting to new lows and becoming incredibly expensive. Things are becoming very tight in this area, and we may have a crisis on our hands soon. Distillates are incredibly useful as chemical solvents, or derivatives for diesel and kerosene. Much of the industrial and manufacturing world is dependent on having distillates around, so things could get hairy quickly. We will definitely be revisiting this next week.
But that is all for the statistics! It got a little long-winded this week, I know. Lots of important data and milestones to keep track of. Still, we have enough time for an interesting development involving, you guessed it, Russia. Only this story does not involve conflict on the western border, but rather business to the south. Russia and China have officially penned a new long-term Sakes and Purchase agreement of Russian natural gas. This will boost Russian gas supplies by about 10 billion cubic meters annually bringing the new estimated total to 48 billion cubic meters per year. Of course, this includes plans for expanded pipeline capacities. The “Far Eastern” route should be complete within three years and the payment will be settled in Euros. This comes pretty soon after Russia’s construction of the Power of Siberia Pipeline that also went to China and became operational back in 2019. If anything, it shows the strong relationship these two superpowers are forming while simultaneously allowing Russia to flex its insane natural gas reserves. Should Russia need someone to back it up (especially near its own soils) it would likely be in China’s best interest to aid them and ensure the natural gas keeps flowing. This is all going down while the EU and the United States are struggling to locate extra natural gas should Russia decide to use its supply to Europe (or lack thereof) as geopolitical leverage. At this point, Russia is setting up a spread of delicious food on its dinner table while the rest of the starving neighborhood watches through open windows. Putin and Xi Jinping laugh and eat and show their vast abundance of resources. The EU is growing more desperate as energy prices skyrocket, and it may not be much longer until they strike a deal that Russia would love to benefit from. After all, he who has the gold makes the rules, but he who has abundant energy owns his neighbors.
Folks, that is all I’ve got for you today. This one was much more statistics-heavy than other episodes. If you want to hear more about current events, especially the European energy crisis, I encourage you to listen to episodes from earlier this year. If you would much rather sit down and read the content, we have you covered as well. www.rarepetro.com is your one-stop shop for all things energy-related. If you don’t find what you are looking for, send an email to firstname.lastname@example.org so that we can address it in a future episode or even generate a short periodical around the subject. We love to learn so no request is too lofty. Again, this has been Tavis Kilian with RARE PETRO, and until we see you next time: take care, everybody!