A stellar week for statistics, cryptic riddles from the EIA, and Russia playing mind games.
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on the 16th of January, 2022. By the time you are listening to this, I will be in well control class learning how to detect circulation issues and prevent kicks. I’ve actually recorded this episode just a little early so I apologize if any groundbreaking news has been released since then. It is kind of strange to think how far we have come since back in the day when I started working on this podcast. In 2019 I was the new intern responsible for getting the podcast arm of RARE PETRO back off the ground. Now it is 2022 and I am out in California learning how to be useful in the field. Thanks for joining me on this journey of professional development. But I know you didn’t come here to listen to me brag about how I’m becoming a more capable engineer each and every day, you came here to learn all about the biggest news stories and statistics within the world of oil and gas. Let’s get into it!
First, commodity prices. As of Saturday afternoon, WTI was worth $84 a barrel. It is great that it has not yet fallen below the new $80 floor, unless it has during some Monday volatility which I am doubtful of. More and more agencies are noting that everyone is continuing to consume more oil at an increasing rate through at least the next 2 years. Even the EIA mentioned that in their new Short Term Energy Outlook report, but more on that later. The demand for oil has been temporarily suppressed thanks to COVID, but we need to continue to build and grow sooner or later. For example, I was talking with our CEO, Anthony, and he mentioned all the buildings that China built in the last 2 years. Unfortunately, the companies that developed those buildings poured a little too much money into the operation before they were even able to generate returns. So what happens? You demolish the buidligns of course! You can do a quick google and find plenty of videos of these massive multi story buildings just getting straight up dropped to the ground in controlled explosive environments. Think about all the oil that went into building those from harvesting and refining raw materials, to power all the heavy machinery, to even just transporting the individuals responsible in those construction projects. All that oil consumed for nothing. Clearly China could not care about effective resource use, and I think a lot of the world is in the same boat. They claim they want to avoid using these commodities, but the price of WTI continues to go up and up. Natural gas had a brief peak above $4.75 on Thursday, but has since settled in the range of $4.30. If you think that seems crazy high, all you need to do is look across the pond to our friends in Europe who are paying top dollar for the same hydrocarbons. Our supply is pretty steady, and we have the ability to produce enough should the demand require it, but I do think the price of natural gas will continue to rise through the winter. Again, natural gas is incredibly useful in heating and power generation alone, and everyone is more dependant on the commodity than they will initially give it credit for. Love to see these strong commodity prices.
Next up, the rig count. 2022 was off to a rather slow start, but the most recent report clued us into a 13 rig build bringing us into the 600s for a total of 601 rigs. This is 228 more rigs than we had this time last year which still blows my mind. That’s some pretty incredible growth over time. Most of the success can be attributed to the Eagle Ford as they are responsible for 6 of those rigs. Then it was the Haynesville with 3, the Marcellus with 2, and the Permian with one. Unsurprisingly, Texas did the best with 7 rigs, Louisiana with 3, and Alaska, Pennsylvania, and West Virginia brought up the rear with 1. Most of these wells being drilled are horizontal and targeting oil. The offshore environment saw some positivity too with an extra 2 wells bringing the total from 14 to 16. Great results in 2 categories so far.
Let’s see if we can make it three and take a peek at results from the inventory report. Well, you would already know the results if you had read the Thirsty Thursday report on www.rarepetro.com. If you didn’t get the chance to read it, or for some reason chose not to, then I can get you all caught up real quick. The EIA has been making big predictions in recent weeks and often overestimating the magnitude of a drawdown, so things were looking bleak when they predicted a drawdown of fewer than 2 million barrels. Surprisingly, the resulting drawdown was more than twice that at 4.5 million barrels. The API made a very similar prediction at just shy of 2 million barrels, but their results were not as desirable. The APIs numbers show a drawdown of just barely more than 1 million barrels. The EIA is now 7 weeks deep into its drawdown streak. The past 5 weeks averaged 3.9 million barrels in drawdowns per week, which does seem to be great news. Still, don’t get too excited yet because this is a period of time where drawdowns are expected. The real challenge comes at the end of January when we do expect to start building inventories. That will be the make-or-break moment to set the tone for the rest of 2022. You would imagine that the recent build would have driven gas prices down significantly, but last week’s report showed a 1.6 cent increase on average. This week’s change shows a 3 tenth of a cent price increase. It is likely that the recent builds will influence pump prices in the coming weeks so fingers crossed for decreased pump prices in next week’s report. If the price goes up again, we’ve got something bigger problems to worry about than weekly builds. Only 9 states have average prices lower than $3 per gallon of regular gas. Distillates are expected to build in this time, but they are building much slower than initially anticipated. This commodity is usually pretty good at regulating itself, so there is no cause for immediate alarm. Propane continues the downward spiral we expect of it. It hugs the lower limit of the 5-year historical range.
So overall, a great week for our regular statistics. My spirits are lifted, and I hope yours are too. Next, I think we take a look at that Short Term Energy Outlook from the EIA that I mentioned earlier. There were a whole lot of factors considered from economy to politics, so I’ll do my best to quickly highlight the most important parts. There are 3 key aspects we should look at. First, they expect global consumption will grow another 3.5 million barrels in 2022 and 1.8 million in 2023 bringing it to an estimated consumption level of 102.3 million barrels per day which is pretty comparable to pre-2020 levels. Next, they predict prices should be up as a yearly average by another $4 (brent specifically). Lastly, they predict US crude production will average 11.8 million barrels per day (up by about 600,000 from 2021) and top out at 12.4 by 2023 which is 100 thousand barrels more than the previous record set in 2019. That is a lot of information, and it seems to make sense at face value. Consumption goes up, so production goes up, no? Well, how is the US going to reach record levels of production if prices are only going to go up another $4 or so in the next year? The current political climate is not set up to support a great growth in domestic oil production. All of that and WTI prices are supposed to only go up slightly? The information certainly seems a bit contradictory. I agree that consumption will increase, but we have for months talked about all the factors that will make increasing US production challenging. The price is going to have to climb quite a bit higher to create an environment where people can drill, complete, and make money. Just some food for thought, but I do encourage you to look at the report. The EIA is home to some great data, and you should draw your own conclusions from the numbers that they present.
It’s been a while since we have taken a look at the European energy crisis. Some new data suggests that the US is doing most of the heavy lifting. The EU’s imports of natural gas from the is five times higher than the Russian gas supply. Russia certainly has the capacity to service a much larger portion of Europe’s gas needs, but their gas deliveries are much lower than usual for the time of the year which is especially strange considering they could be making a whole lot more money by doing so. Sure, the gas price would fall a bit, but the sheer magnitude of gas delivered should be enough of an incentive. The biggest possible reason for this situation lies in Russia’s Nord Stream 2 pipeline. Claiming that you are struggling to meet gas demand is a great way to incentivize the rest of Europe to support bringing Nord Stream 2 online. A couple of weeks ago we talked about the small country of Kosovo. People in the country were protesting the government for a number of reasons, but fuel prices were a huge factor for many of the protests. The government would love to calm civil unrest by bringing more hydrocarbons in (although affording them would be an issue) but other countries aren’t in a position to sell them supplies. So instead, they had to hire Russian “peace officers” to deal with the situation. If Russia plays its cards right, many people will be in the streets complaining about high fuel prices all over Europe, and political leaders will ahve no choice but to grant access to Nord Stream 2. Russia’s biggest bargaining chip will always be its ability to supply energy to those who demand it. They have been found guilty in past years for artificially inflating prices by limiting the supply of gas they deliver to other countries. If Russia plays it right, Nord Stream 2 could gain a whole lot of support in the future and be approved in as soon as months. If not, they can repeat this strategy year after year until there is no other choice. A large portion of the world is looking to cease hydrocarbon exploration and production. Either way, someone will have to meet the demand.
A sort of dark and foreboding story, I know, but that is where we will close out the episode. If you didn’t quite get your news fix, I encourage you to go to our website www.rarepetro.com to find more resources. We’ve got new content coming out almost every day, so you might as well make it a part of your daily routine. A little birdy told me that an app should be coming in the future to make learning about the world of energy even easier, so keep your ears to the ground. Other than that, you can send any questions you have to podcast@rarepetro.com so that we can address them in a future episode. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!