A big futures loser, the worsening energy crisis, and OPEC’s inability to increase production.
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian bringing you another episode of Monday Madness on January 31st, 2022. Sorry that this episode is coming out a little bit later than usual. I had to attend to another project this morning, and I tell you what: it feels good to stay busy. Lots of folks out there with no jobs or the inability to work on projects they are passionate about. Take a little moment to be thankful to be a part of an organization, or at the very least, be proud of yourself. Not everybody wakes up and chooses to pursue excellence. But I know you didn’t come here for motivational speeches, you came here to hear the biggest news and statistics in the world of oil and gas, and we are already behind schedule. Let’s get this show on the road!
First of course we look at commodity prices. While markets are looking wild and unpredictable, commodities are doing alright for now. WTI reached $87 by Wednesday and shows no plans of slowing down. The current price is $88.15. Natural gas spent most of last week climbing from $4 with a spike up to $7.35 on Thursday before settling back down to $4.87 by Friday. Why the spike? Thursday was the last day of that contract’s life. Remember, gas futures are based on monthly contracts, so decisions are often based on time as the owner of the contract has to decide whether or not to exercise before they are forced to. The last trading day for the contract usually results in a rather low volume as most people have exercised by this point and are already looking towards other contracts. In the past 14 months, 12 final month trading days have seen a price increase. But, of those 12 increases, the average was about 12.1 cents. Why did we see such a dramatic increase in price? The true answer is that we will likely never know for sure. But many analysts are presenting a theory that I find myself agreeing with. The volatility could be suggestive of a large player in the market getting couch short. By that I mean a large producer may have failed to make a delivery at Henry Hub which forced them to cover loads of short positions. This makes sense if you consider market sentiment over the past few months. When natural gas was up big at $6, the following drop probably looked like a juicy opportunity for many. After all, everyone was predicting colder temperatures and tighter gas supplies (RARE PETRO included). Why not go long on a natural gas position? Unfortunately, it seems like somebody really over-exposed themself in the process. Regardless, it looks like a $5 price point is right around the corner.
Next is the rig count. So far it looks like 2022 may be a repeat of 2021’s trend. By that I mean we continue to see steady and significant increases. This week we see a 6 rig increase bringing the US total to 610 or 226 more than we had this time last year. The Barnett shale is back in business as someone is responsible for starting up 2 rigs which account for 100% of the drilling activity in the state. The Haynesville, Marcellus, and the Permian each added a rig to their own portfolios. But as one field comes alive, another dies out due to the balance of thermodynamics… well, not really, but that is how it happens to play out. The Ardmore Woodford lost its last rig and now has 0 drilling activity. State by state, Texas leads the pack with an additional 4 rigs added. Oklahoma, Pennsylvania, and Louisiana follow behind with an additional rig each. New Mexico is a bit unlucky as they lost a rig. The dominant rig well type is, to no one’s surprise, horizontal, with a stronger emphasis on oil than gas. The offshore environment experienced no change.
Lastly, the inventory report which you could have read on www.rarepetro.com. Come and join the party on this Thursday’s report! We had some mojito’s and a whole lot of fun last week, and we will be sure to feature a fresh new cocktail this week. As far as the data goes, The EIA predicted a small drawdown of less than a million barrels built the resulting build was over 2 million barrels. The API was a little more modest with a prediction of a 400,000 barrel drawdown, but they reported a drawdown that was twice as big. Due to confirmation bias, we will be favoring the API this week. This is the second week in a row that the EIA has reported a build following a 7-week drawdown streak. According to the historical data, this is exactly the type of activity we would expect for the month of January. We should expect builds through at least June of this year. The magnitude of the builds will set the tone for oil prices in the coming months. Gasoline inventories continue their upward climb into healthy inventory ranges, but the acceleration has slowed as the build this week was only 1.3 million barrels. This lines up with what is historically accurate for the time, but the builds are predicted to end within the next month and a half. This is now several weeks of rather significant inventory builds, but gasoline prices remain high. The cost for a gallon of regular-grade gasoline has gone up 2.8 cents on the week. If you are scratching your head at this point, don’t feel too bad. Another big factor is the fact global oil supplies are tightening. This is why oil prices are climbing, and oil is necessary for gasoline, so you can understand why energy inflation is outpacing other indicators. This is why gas is becoming insanely expensive when compared to previous years. Only Arkansas, Kentucky, and Mississippi are enjoying regular grade prices lower than $3 per gallon.
Propane is business as usual as it follows expectations, but distillates are beginning to raise some eyebrows. Another drawdown brings it further below the historical 5-year average. In fact, the separation between the historical average and current inventories hasn’t been this drastic for years. This drop isn’t exclusive to the US. Most of Asia is witnessing drops within their own distillate inventories as well. This is causing jet duel prices abroad to go up rather significantly only putting more stress on those dependent on distillates. This low level of distillates has now crossed from interesting to concerning, and the next few weeks will decide just how much more worried we should be.
…aaaand that wraps up the statistics for the episode. It’s time we take another look at that European energy crisis. It turns out that Europe has now turned to the US to help with finding backup sources that Russia does not have control over. Russia continued to move 100,000 troops to the border near Ukraine, and it looks like people in the surrounding area are starting to sweat… metaphorically of course because they don’t have the required energy resources to be too warm. The Biden administration has attempted to help by calling gas buyers in South Korea, Japan, and other Asian countries and pleading with them to redirect shipments to Europe. I can’t imagine it would be especially cheap to convince these countries to send their already paid for resources to someone else. After all, Japan never decided to enforce the policies that left the UK in this position. Even the US isn’t in a position to help as our own natural gas inventories have once again dropped below five year averages. It really isn’t anyone else’s problem except for Europe and all the big players there. Russia is definitely using this as pressure to justify the full acceptance of Nord Stream 2. Not only that, but they will have political leverage if they attempt to go annex Ukraine. Still, Putin himself has described the whole situation as, “another brilliant example of fake hysteria.” Still, fake or not, European officials are calling on whoever they can to deliver energy. While some are able to deliver, most are in no position to share, or don’t mind waiting for this situation to get a little worse so that they can make even more money off of the misfortune. Once you have an energy crisis that involves several countries, everything gets to be a little hairier. Germany is not doing any of the heavy lifting in negotiations as they claim to be secure in their energy, but most everyone else is finding them in a bad spot. I know we talk about this almost every week now, but this will likely be the last update before something really significant happens whether that is a big policy change or civil conflict. As it stands, the energy crisis is projected to get much much worse.
Next, we will take a look at Nigeria’s estimated losses. After OPEC+ loosened the restrictions on oil and gas production, some countries are really struggling to keep up for a number of reasons. Nigeria is dealing with civil unrest in the form of a force majeure and sabotages, and production continues to fall. It is estimated that in December they declined in production by 6.6 million barrels meaning that they lost out on almost half a billion dollars in revenue. This is a huge problem for Nigeria as 10% of its GDP and 86% of its export revenue is tied to oil and gas. This is making Nigeria a key contributor to a tighter-than-expected global market. Libya and Ecuador are smaller contributors to the problem, but at the end of the day, OPEC+ has introduced far less production than the world initially anticipated by about 790,000 bpd. The energy crisis is threatening to grip more of the world than just Europe, and I think there are many international players who are rather excited to serve the world’s energy demands. It should bring them a lot of money.
But that is all we’ve got for today’s episode. As always you are more than welcome to send us your energy related questions at podcast@rarepetro.com. We have plenty more content on the website and are pushing out new information almost daily. Follow this podcast and our page on LinkedIn. If you consume enough of this content, you will be certain to gain a competitive edge on the other people in this industry. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!