Join Tavis for the wildest statistics, analysis of Russian escalation, and admiration of Australia’s energy policies.
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Alrighty everyone, welcome back! This is Tavis Kilian bringing you another episode of Monday Madness on July 5th, 2022. This episode is being researched, written, and released on a Tuesday as yesterday was the fourth of July. I was lucky enough to get to spend it with my mom (happy birthday to her) as we walked around Estes Park. Neat little town! I’ve only ever driven through on my way to Rock Mountain National Park, but it was a lovely place to spend an afternoon. I recommend that you take the cable car up and hike around above the town. Great views and cool temperatures in the summer. But I know you didn’t come here to listen to me speak as if I was some world renowned travel agent, you came to talk about the biggest statistics and stories within the world of oil and gas. Let’s dive deep into commodity prices.
As I write this script, WTI is tanking. Last week bounced between $110 and $115, which is about what we have come to expect. This morning however, WTI opened at $110 and is quickly falling in price. At about 9:30 Mountain time, oil fell to $100. This is the lowest price we have seen since about May. This isn’t just WTI, even Brent is down almost $10 to $104. American natural gas is quickly losing its value as it sinks to $5.50, the lowest value we have seen since April. It certainly could be a result of a balancing out between commodities as oil and gas in Norway and other parts of Europe become more and more expensive. We just can’t get a ton of our gas to market, especially with the Freeport incident. I also think these commodities are trying to cool off after running up at an absolutely ridiculous pace. We may see some calm, but I doubt it will last for too long, and I am very confident that things are going to get pretty dicey by the winter. It may seem far out, but in 3 months we will be seeing some very different weather patterns, and another 3 will really flip it around. RARE PETRO believes energy will get more expensive, and if you are a long time listener you know why. If you are a bit newer to the podcast, go ahead and frac that follow button, and you too will understand in a matter of a few months.
Next is the rig count. After weeks and weeks of great gains, we see a 3 rig decrease. Nothing terrible as it is one of the largest decreases in the past year or so, but it is a negative rig count nonetheless. This brings us to a cool 750 rigs in the US, which is 275 more rigs than we had this time last year which highlights the insane growth we’ve seen. Dropping 3 rigs isn’t really too bad. Basin by basin data is a bit unique. The largest growth we saw was one rig in the Ardmore Woodford and Arkoma Woodford. Otherwise the Utica and Marcellus each lost one, the Eagle Ford lost 4, and the Cana Woodford lost 5. That is an especially big change for the Cana Woodford which only had 32 rigs to begin with. Otherwise, it’s just sad to see one of our favorite underdogs lose 4 rigs. We are rooting for you Eagle Ford. State by state data is pretty bland as Louisiana and New Mexico gained one. Ohio, Pennsylvania, and Utah each lost one, and Texas lost 2. Not often you see Texas at the bottom of the list. It seems as if there is a redistribution of of rigs drilling horizontal and vertical wells as the focus shifts to directional. The good news is that the Gulf of Mexico was able to add one rig to its total, so it’s not all bad. Again, keep an eye on the long term. We’ve seen an insane amount of rig growth since the pandemic, but we are still below the pre pandemic count of about 800. Not too much further to go!
Lastly we take a quick look at the inventory report. Thirsty Thursday was a hit last week, and here’s the data in case you didn’t catch it: The EIA is back for their regularly scheduled data, and they come bearing good news. After predicting a small drawdown of about a half million barrels it was revealed that the drawdown was much closer to three million barrels. Normally the EIA and API struggle to agree with their data. This time around, the API predicted almost no change and reported a drawdown of almost 4 million barrels. Inventories have been trading sideways for 6 months now, pretty much the entirety of 2022. While that may be reassuring, it doesn’t mean that we will soon be building the inventories. If anything, this current level of production could run out and then we see the same decline in production we saw through 2021. Best case scenario we look at inventories that are comparable to the lows we saw in 2020. In better news, we finally see a build in gasoline inventories of some significance. This 2.6 million barrel build is much needed as the US average gas price hit $5 about 2 weeks back. Fortunately gas prices are coming down just a bit, but the proposed gas tax holiday could change that. Historically, those in the middle of the supply chain find a way to pocket the difference, and the price remains unchanged. Once the grace period is over, the prices then skyrocket as the tax returns. Hopefully it is different this time around, but many are already expressing their doubts. One of the more popular theories postulates an artificial increase in demand. Suspending the gas tax in the summer could quite possibly inspire many folks to take a vacation after 2 years of restrictions and lockdowns. This would have the effect of draining local inventories even faster, resulting in potentially increased gas prices. Whichever way you look at it, the root issue of the diminished ability to produce is not being addressed. The dip in commodities could just be a temporary reprieve. Distillate inventories continue to build, but not quickly enough to bring them out of the historically low territory. Even though it is increasing, this is what one would expect to see for this time period, so it is not particularly impressive. Propane inventories have now tiptoed into historically low territory. This could be especially bad for the winter season should this continue as many folks in rural areas rely on the gas to heat and power parts of their lives. This could in fact be the calm before the storm.
But that wraps up our weekly analysis of statistics. Next we’ve got a couple of stories to look at. You should know that there is some upcoming Nord Stream maintenance. If you don’t know, the NordStream pipeline is a recent network of pipelines constructed to deliver gas from Russia to Europe. While many folks around the world said it was a bad idea and would afford Russia too much geopolitical power, the pipeline was still constructed though there was some disagreement on the Nord Stream 2 expansion. Still, the primary pipeline exists, though the full extent of its power has yet to be exercised… until this month. The pipeline is set to shut for maintenance between July 11th and 21st. Sure the flows have dropped a good 40%, but this could have some bad implications. Some banks forecasted that the pipeline could be back and operational well within the given time frame. The Russians are capable of getting it done on time, but more and more folks are predicting a longer than anticipated downtime. After all, what is to stop Russia from saying that there is more work to be completed than expected? It would make their gas more valuable, and the rest of Europe has shown that it does not want to escalate the situation. While all speculation at the moment, this is going to be a very important time period to keep your eye on. It has severe implications for world markets. I’m sure we will speculate even further on this in our next episode of the Wacky World of Energy, so keep an eye out for that. We will also be diving into the Norwegian oil strike that could stop energy flows in Europe. Good stuff to come, and you can even watch it on YouTube.
Next is another story in the long line of countries who are starting to secure their energy resources. In something straight out of Atlas Shrugged, countries are nationalizing or redefining how they will allow the rest of the world to consume their energy resources. In 2017, Australia’s government introduced a domestic gas security mechanism that allows Australia to redirect gas supplies. Due to their location and great natural resources, they ship a ton of gas to Asian markets. Still, this Russian invasion of Ukraine has highlighted the need for energy independence, and Australia understands that. The legislation that supported that mechanism was set to expire next year, but the Labor government won their last elections and would look to extend it though 2030. The mechanism essentially allows them to recognize when domestic inventories are falling too low and redirect production from their platforms back to the country. Sure, Asia may not have their contractual deliveries properly executed, but Australia understands they need to have enough for yourself to eat before you can start selling the rest. This comes at a time where Australia is struggling with their own electricity crisis much like the rest of the world, but it is their second in the last 5 years. When they began producing and exporting LNG for foreign markets, the demand for their gas was too much and left themselves with their pants down. Either way, Australia is developing energy infrastructure, interacting with markets, and navigating a new landscape successfully. You can’t always do it without any snafus, but they continue to analyze how their policies affect the world and themselves while crating unique policies in response. A wonderful system that greatly contrasts how America has been dictating how and when energy companies are allowed to operate while ignoring issues revolving around domestic supply. Good luck to Australia, and I wish them well. This is a situation that the US does not necessarily experience as we operate in many places around the world, but I wouldn’t be surprised if the Australias and Mexicos of the world started telling us to kick rocks.
But ladies and gentlemen, that is about all I have for you today. Lots of change in the global landscape and the potential for insane escalation on Russia’s end. Keep your eyes open and your head on a swivel. Lots of good information out there, but it can be difficult to know where to look. Let us do the hard work for you! We love independent thinking and digging through all types of energy media. Go ahead and follow us on wherever you get your podcasts and LinkedIn so you aren’t missing out on the content that we are releasing almost daily. Thanks for tuning in and until we see you next time, take care everybody!