The China special of the RARE PETRO podcast. Petrodollar vs petroyuan and Chinese demand for a whole lot of crude.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on January 9th, 2023. I hope you had a successful first week of 2023 and are ready for another 51 more because everything is back in full swing! Well, supply chains continue to be disrupted, labor is still stretched too thin, and our federal government has spent most of this year bickering over who will be speaker of the house… so maybe not full swing but I know things in my neck of the woods are moving along! The world is changing and it seems like the 20s of this century could be a lot like that last. I see lots of change in the next few years, but I see just as many possible timelines that change can push us through so we will just have to stay patient and optimistic. But you didn’t come here to listen to the pensive thoughts of a random engineer in the middle of Colorado. You came here for the best news and insight into the industry and by golly we plan to give it to you.
First of course is pricing. Right now WTI is spending time around the $76 range and the last few weeks have solidified some bounds. Even though it spans the transition of a new quarter, we have repeatedly tested a few points. At the bottom we have a $73 floor. Any time spent less than $73 was rather short lived as it bounces right back up. The top is represented by an $80 ceiling. Why oil commodities are priced at this point, I do not know. If anything, we are in an arguably worse position than we were in while oil was more than $100 a barrel. I think patience is key here, and the EU’s response to Russia’s response to their price cap will likely dictate some rather serious movement in energy markets. Either way WTI still trails Brent by about $5 as they exhibit near identical patterns. Natural gas has made some minor recoveries as it is now again back above $4 and only did so this morning. It spent most of the weekend around $3.600 but for some reason is doing much better this morning, though this low price is still comparatively high for recent history thanks to the fraccing boom. Most people online had attributed the low natural gas price to cold weather, though it seems there were no dramatic changes over the weekend, so there is certainly something more at play here. These commodities are still pretty healthy and afford a lot of otherwise uneconomic production, so sit tight.
Next is the rig count. The Haynesville had a less than ideal week as it lost 3 rigs. The only other basins with losses were the Arkoma Woodford and Marcellus who lost one each. The Granite Wash saw some significant gains adding 2 to its total with the Mississippian and Utica adding one each. Now hold on to your socks here because the state by state change is a little jarring. Two states experienced growth – those being Texas and Ohio with 2 and 1 rigs respectively. Otherwise Pennsylvania lost 1, California, Louisiana, and New Mexico each lost 2, and Oklahoma leads the losers with 3 lost rigs. This is a big week over week change and I would like to believe it has a lot to do with the new year, but we will just have to wait until next week to see if that’s true.
Next up is the inventory analysis which was already written as a “Thirsty Thursday” periodical on www.rarepetro.com. Go ahead and work your way over to the website because we have plenty of content that you are sure to enjoy that will definitely help you to grow as an energy professional. Here is what you may have missed from the most recent Thirsty Thursday: We aren’t starting out the year with the best of records according to the EIA’s most recent report. They expected a small build and weren’t too far off the actual results of 1.7 million barrel build. Not the most extreme build we’ve seen in recent months, but certainly a bit of a downer to open up the year with especially considering it was worse than the week before. The API must have had too much to drink as they haven’t forecasted a number in 2 weeks. Nevertheless, they reported a build of 3.3 million barrels which is almost double what the EIA reported. Would you believe me if I told you we were in the year 2023 and still taking oil out of the SPR? Well I can’t quite confirm it yet, but the latest data from the end of last year shows another drawdown of almost 3 million barrels. This leaves us at a total of 372 million barrels which is the lowest it has been since roughly November of 1983. This is also half of what existed in the SPR when Biden took office. These recent builds in domestic inventory are anything but massive and that is reflected in the US domestic inventory levels. We have now crept back into the historical 5-year average but only because last year set a new record for lows. We should expect to stay at or near this point in 2023. Gasoline prices may be low, but we are starting to fall below the 5 year average once again which could easily reverse the pricing trend. As a matter of fact, that reversal has already begun. The national average now sits at $3.290 which is an increase of 11 cents from last week. Is this the beginning of a period of more expensive gasoline? It is quite possible. The SPR releases gave us a lot of feedstock for refining, but it never addressed the root issue of undersupply. Poor Hawaii was one week away from less than $5 gas prices but the recent trend reversal dashed all hopes. Distillates continue to break records at new lows despite 2022 being a year of historic lows. The whole year could have been characterized by the severe lack of supply, and 2023 could be a year of new lows. Propane remains at healthy highs so there are no concerns there.
Now it’s time to move onto a few stories. If you have been a long time follower of rare petro you would know that one of our favorite concepts to talk about is countries that challenge the petrodollar, specifically China. A barrel of oil is traded in dollars as that is the world reserve currency it is traded on. This allows easy translation of value across the world and also affords the rest of the world a reason to use the dollar. China, of course, wants to compete with that. The “petroyuan” (as many experts have been calling it for years) continues to threaten the petrodollar and had its biggest year in 2022. Western Europe froze Russia’s accounts last year, but China accepted the cheaper crude with open arms allowing Russia to overcome Saudi Arabia as China’s top oil supplier. Not only that, but just last month Xi Jinping set up a meeting in Saudi Arabia to urge the Gulf Cooperation Council to use the Shanghai Petroleum and Natural Gas Exchange to carry out yuan based energy deals. China is planting a seed in the mind of many of these countries that they don’t have to play by the rules of the west. In fact, the United States and their slap happy sanctions could be rendered useless if enough folks hop aboard the petroyuan hype train. Saudi Arabia just penned a deal regarding $30 billion in trade deals with China, so what is to stop their other colleagues in the Gulf? If China is able to bring in Russia, bridge the relationship gap with Iran, and get Venezuela in the mix, it has an opportunity to secure petroyuan contracts with 40% of OPECs proven reserves. Jinping isn’t a foolish man, and we should take great care to keep an eye on China so that the petrodollar is not threatened for our sake.
We may as well stick with the topic of China as we move onto our next story. The price movement from this morning is now being attributed to China and their surge in oil demand. China issues quotas to its importers and refiners and these can often be excellent benchmarks for judging the health of Chinese industry. A second batch of quotas just rolled around for 2023 which raises the quotas for this year by 20%. This is incredibly bullish for traders for a few reasons. First, China is one of the biggest importers in the world meaning a 20% change in demand is significant. Second, the government is the one issuing these quotas. One may extrapolate this story and interpret that China is perhaps serious about reopening their borders, letting people out of hard quarantines, and getting back to the way things used to be. It is definitely possible that this is just a move to push prices higher for other markets, but I don’t really see that being the primary reason for this announcement. This means it is full steam ahead for Chinese refiners as the country looks to get back on track for massive economic output.
There you have it folks, the China special of the RARE PETRO podcast. I would say China poses the largest threat as a potential competitor to the United States. We control a lot of what goes on in the commodity space, and China is doing a great job at loosening our grip. If we are not careful with energy policy, we could find the world dominated by a petroyuan contract before the end of the decade. After all, we saw how much can go down in a few years, and it is only 2023. Change is the only constant, and the best thing you can do to keep up with the change is continue to engage with the content that RARE PETRO produces. The podcasts, periodicals, and video essays will help you to always be on the cutting edge of industry and do you best. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!