A big bang to the new year! Welcome to the first episode of Monday Madness for 2023.
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Audio Transcript
Alrighty everyone welcome back! This is Tavis Kilian bringing you another fresh episode of the Monday Madness podcast in 2023. I’ve already done it folks. I’ve made the same mistake I make every year. As I typed out the date for this podcast script you had best believe I typed 2022 like I was still living in the past. Thank god we live in the digital age that automatically timestamps everything because I used to make this mistake when I was writing checks for lunch money every school year. Yeah that’s right, I was writing checks to the school for lunch money as my parents would transfer it into my account and probably didn’t want me to lose the cash. But you didn’t come here to listen to the tales of who they used to call “old man Tavis” way back in the day. You came here to listen to the biggest statistics within the world of energy and the secret stories that may not be reaching the front pages of traditional media companies.
First of course we start with commodity prices. WTI is a tough one to read at the moment. Does it want to be above or below $80? This is a very volatile testing point that many claimed would end in a cheaper barrel by the time the calendar flipped, but that just isn’t the case. While the claims of the $100 barrel weren’t quite fulfilled, the same goes for the $50-60 barrel that many touted. That is not to say that this morning has been good for WTI. It opened up at about $80, peaked at $81, and has since crashed down to about $77 and a half. Do not be alarmed my friends! While Monday tends to be incredibly volatile, we have the added benefit of a quarterly transition. That’s right folks. This is the first federal business day of 2023, so many traders are adjusting benchmarks and contracts for the upcoming quarters. Give it a day or 2 and we will have this all sorted out. At the moment, the spread between WTI and Brent has shrunk to about $5. If you look at spread data for the recent year, this is one of the lowest points we have seen since last April. It peaked around July at $14 for a brief period, but right now it seems to be trending downward. Brent currently sits in the low $83 range. Natural gas continues to fall in price as it is now less than $4 per MMbtu. That’s right! As I wrote this script the ticker briefly read $3.999. That is the lowest price we have seen since February of 2022, and I have half a mind to predict it will fall even lower. This price swing most likely has to do with the fact that the volume of natural gas being imported has decreased dramatically. This is primarily because most of Europe had been importing boatloads of gas to prepare for the time when they would no longer be purchasing gas from Russia, but that is a double edged sword. Once Russia stops selling to those observing the price cap, the gas has to come from somewhere and I pray the US has the export capacity to service everyone’s needs. Until then enjoy much cheaper natural gas at prices you came to be familiar with around 5 years ago.
Next is the rig count. A rather anticlimactic way to open up the year, but there was no change on the week leaving us with a total of 779 rigs or 193 rigs more than we had this time last year. Now just because it was a change of 0 doesn’t mean that folks in the energy industry kicked their boots up and took a nice break for the holiday season. No sir, we have 3 more rigs in the Ardmore Woodford and 1 more in the Permian. We have one less DJ and 2 less in the Cana Woodford. Definitely a bit slower than usual, but there is still change. State by state this leaves Texas up 2, Oklahoma up 1, with Louisiana, New Mexico, and Utah down 1 each. There was no change in the Gulf. There is a seeming emphasis on directional wells that will be targeting an even split between oil and gas. Overall, not a bad way to start out the year. Sure we could have seen a few more rigs added to the total, but it could just have easily gone the other way, so keep your chin up everyone!
Lastly is the inventory report which was not covered last week. I ran out of time to get a Thirsty Thursday together before I left for Iowa, but that doesn’t mean we won’t visit that data today. After a few weeks of flip flopping builds and draws at varying magnitudes no one was really sure where the domestic inventories would travel. The EIA expected a 1.5 million barrel draw but reported a little more than 700,000 barrels as a build. The API also expected a drawdown of about 3 million. They were right about the direction, but wrong about the magnitude. The reported draw was actually much closer to 1.3 million barrels, but a draw nonetheless. Believe it or not, the SPR inventory decreased yet again. The most recent data suggests another 3.5 million barrel drawdown leaving the SPR at just 375 million barrels or the lowest amount we have had since December 9, 1983. While the sharp decline is definitely slowing, it is a far cry from leveling out. The White House said they would begin rebuying soon, but no one can be sure when “soon” is. As oil continues to trickle out, it may be a good time to start that process immediately as the average price per barrel of oil released is just north of $90. If they wait too long, the whole operation may have been conducted at a loss, so there is no time for dilly dallying. Gasoline inventories in the US looked to be headed for historical normal territory but it now finds itself right up against the bottom of the range. Do keep in mind that Christmas and the New Year just went down so a lot of that could be associated with folks traveling home for the holidays. Give it another week or 2 here before we begin to freak out about being right where we were 6 months ago. Regardless of how you look at it, 2 straight weeks of 3 million barrel drawdowns means something significant. Distillates exhibited the same behavior of gasoline but are now struggling to maintain historically normal levels. It butts right up against the lower range of the 5 year historically normal range but may not have the oomph it needs to really be safe. This is a good one to keep an eye on as well. Fortunately for all you rural folks and grill masters, propane continues to do well as it remains just above the historically normal 5 year range. If all else fails you still maintain the option of purchasing a propane heater.
But ladies and gents that is all we have for our statistics. Next we have some news stories to peek at. This first article revolves around a study that was conducted concerning the future employment of current energy workers. With waves or aggressive energy policy washing over California, some are concerned about where they will turn if their job is rendered obsolete. The report in question mentioned 2 out of 3 energy industry workers will not have to retrain too much to be able to find work. Think of your welders, plant operators, or managers. There is a need for these people in many industrial, construction, or corporate environments. While this is touted as a positive point by many news agencies, I still have my concerns for the other 33%. That is too large a number to be considered insignificant. It gets worse as the study continues. 1 in 4 workers will end up making less than what they were before. As for the ceiling, only 7 percent are expected to earn more than what they are now. Is it all that surprising? The roles these folks are expected to transition into are government investments at a state and federal level. The California oil industry contains 45,946 workers with 18 percent of those being in the core extraction positions. It is frightening to image that more than 15,000 of those people will have to search elsewhere for employment. In order to ensure what the local government considers a just and equitable transition, there is a fund of $40 million that will be used to invest in training these people for new programs. I am incredibly excited to see how this works out, though I do worry about the remaining service companies. We can’t afford to transition away 100%, but what does it do for competition in markets when you shrink a sector so aggressively? I don’t expect too much good can come out of it.
Next up, support for business in the UK will be waning. If you remember the 50 day Prime Minister, Liz Truss, you may remember when she implemented a discount structure for business. The basic premise is that the price is capped, but the gap between the price and the actual cost per unit of energy would be subsidized by the government. This was intended to be a short term solution, and I think people believed the conflict between the Russia and Ukraine would be about finished by the time they were ready to remove it. Unfortunately, that is not the case as the original 6 month “shelf life” of the policy is being extended, though the benefits are being halved. While this is an appropriate solution for the short term, any hike in price would result in tax payers holding the bag. This also raises the cap for household energy prices from 2500 euro to 3100 euro. Let’s hope things don’t become much worse because the tax burden is on course to rise to its highest level since World War II. I hate to extrapolate in such a negative way, but that doesn’t leave them in a strong position should World War III erupt.
Folks things are gearing up in the energy world. The ball is in Western Europe’s court as they decide how to manage Russia’s ability to deny energy to the West. If you want to stay in the know, there is no better way than by continuing to follow RARE PETRO by subscribing to this podcast, or just by checking out our website www.rarepetro.com where we have plenty of written content, older podcasts, and old video essays. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!