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Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on July 11, 2022. What a lovely weekend we just came off of. I had the time to relax and catch up on chores. In my downtime I started reading Ken Kesey’s “One Flew Over The Cuckoo’s Nest,” and I gotta say, I am incredibly impressed. What a zany and unpredictable storyline! If you are looking for a fun classic to dig through, I highly recommend this one. Shane if you are listening I’d like to express a big thanks for gifting me a copy. But this is already getting waaaay off track. You didn’t come here to listen to me review some of the great American classics, you came to hear all about the most volatile statistics and interesting stories that the world of energy can bring to the table. Let’s get to it.
We start off the way we always do by taking a peek at the latest commodity prices. Folks have been rather upset lately as commodity prices and markets falter. Lots of talk of an upcoming recession that I’ve been hearing whispers about for years. Whether or not we can prove the possibility of a recession, we predict that energy prices will not go down. If anything, they are only expected to get higher. At the moment, WTI is just over $100 at $103. Last week we saw prices as high as $110, but after Monday they fell to lower than $100 for a short period of time. Brent followed the same pattern, but lead WTI by a few dollars at any given time (though it did temporarily break below $100). Natural gas spent a lot of time hovering around $5.50, but eventually took off on Thursday as it pushes back upward. Right now it is at $6.50, but I don’t think anyone is certain where it will end up. Our export capacity is still diminished thanks to the Freeport explosion, but it seems as if the negative market sentiment surrounding that is slowly dissipating. The energy crisis continues to get worse and worse, and I expect the US is eager to service those needs meaning our commodities still have plenty of upward potential.
Next is the rig count which has gone up 2 to 752 which is 273 more rigs than we had this time last year. A slight improvement from the negative 3 count from last week leaves us where we started a couple of weeks back. While this is a steady improvement, it is still a far cry from the 800-900 range we grew comfortable with pre-pandemic. It’s crickets as far as the finer data goes. The Granite Wash and Permian each posted another rig. State by state Louisiana and Texas are up one each. That’s pretty much it. The new rigs are targeting oil and will both be vertical. The Gulf of Mexico saw no change and remains at 17 rigs… a healthy total.
Lastly, we gotta talk inventories. We always put out our Thirsty Thursday report which dives into some great graphs and data, but if you missed last week’s edition, I’ve got you covered. The EIA brings bad news last week. While they expected a 1 million barrel drawdown, they actually reported a more than 8 million barrel build. The API also expected a drawdown of about a million barrels but reported a large build. Half the size of the EIAs, but a build nonetheless. This build is comparable to the large ones we saw through April and May. The most significant thing to note is the historically low inventories have now broken back into the 5-year range. We don’t anticipate this to be a regular occurrence as the last year and a half has been mostly inventory decreases with minor builds. Even the 40 million barrel build of 2021 was wiped out in a matter of months. We are fast approaching a time of year that has historically trended downward, so this will be one to keep your eye on. Last week’s build in gasoline has been immediately sucked away dashing hopes of strong and continued inventory growth. The 2.5 million barrel decrease brings us below 220 million barrels total here in the states which are about 24 days of supply. Gas prices have fallen about 21 cents per gallon since the start of June. Some folks in the administration believe the Biden oil reserve release was “single-handedly responsible” for halting the increase in gas prices. Unfortunately, there are many more factors, but we won’t argue with the precise use of “halting increase” as opposed to “lowering.” The temporary reprieve will likely not be enjoyed for much longer. Some states even moved forward with implementing their own gas tax hikes to maintain scheduled rate adjustments. This will certainly not lower prices for the folks affected. Distillate inventories have faltered. After several weeks of builds, it looks as if getting back into historically normal territory will be much more challenging than we thought. What makes this decrease doubly impactful is the time at which it comes. This has historically been a time period where we see lots of inventory builds, but decreased refining capacity and spot shortages worldwide are making sure inventories don’t get much better. Even propane dipping below its historical range holds terrible implications for winter.
But that brings us to the end of our statistics and to the start of our news stories. First, we’ve got a story in Colorado as a large portion of our audience claims the state as their stomping ground. The COGCC levied a fine against two oil and gas companies, Lasso and 31 Operating, worth $2.2 million. It was originally a threat if the companies were not able to operate within the regulations of the Commission and state, but the companies struggled to meet them (or that is at least how the COGCC felt). Instead, the regulators are taking over 106 wells and dropping the fine. Commissioner John Messner was confused as to why the fine was dropped saying, “I’m trying to understand what other remedies may be available here,” Messner said. “We are suspending a $2 million penalty and taking on an operator’s entire portfolio of assets that they are clearly walking away from because they are unable to operate in the state of Colorado in a manner that’s protective.” He later mentioned the agreement gave him heartburn as it felt like a get-out-of-jail-free card. An attorney for the two companies said that the staff and its council, “present certain facts through its perspective that perhaps my clients don’t necessarily agree with.” I gotta say that I may agree with the attorney. I tuned into the KPK trial that lasted a couple of days, and the current commission has a clear bias and pushes really hard for others to see their perspective and their perspective alone. I don’t care what industry you use as an example. Participants will never see eye to eye with regulators, and that is the basis of navigating compromises in compliance. Too far towards operators and you fail to prioritize the environment and local interests. Too far towards regulators and they take your entire portfolio of wells and find another company to abandon it. It is important to establish a compromise, but I think regulators often forget that we have some if not the best regulatory guidelines in the country. California is the only other state that is about as comparable if not more stringent in certain ways. Good luck to the companies that find themselves in the presence of the COGCC because it seems more and more difficult to work with each coming year.
Next, we have yet another story regarding compliance and beautiful land. ConocoPhillips received approval for their WIllow project in Alaska back in 2020. The project is working to construct a pipeline that could deliver 160,000 barrels of crude per day from reserves estimated to contain between 400 and 750 million barrels. An Alaskan district court judge contested the BLM’s approval saying that the BLM had overlooked the greenhouse gas emission footprint of foreign oil consumption in its environmental review… that seems a bit beyond the scope of a domestic project, but who knows. Perhaps it is a legitimate concern, or maybe it was a simple roadblock to soft-lock the project. Either way, the BLM conducted the report and outlined 5 alternative paths for the project, one of which being withholding approval of the project as a whole. The Biden administration may have a conundrum on its hands with this one. While they do aim to lower emissions and improve environmental regulation, they must also deal with the rising cost of energy. Environmentalists are certainly piling on the pressure. One Alaskan conservationist said this was, “an unparalleled climate and biodiversity threat that puts President Biden’s climate legacy at risk.” I certainly know how I expect the administration to react, but I’ll shut my mouth until we see some actual decisions.
But folks I think that is about all we have time for this week. We hope you enjoyed the episode! If it felt a little stiff and stuffy, go ahead and frac that follow button so you can listen to the next podcast we release which will likely be the “Wacky World of Energy.” We Anthony and I let loose our wildest and unbridled theories and speak freely with how we feel about current news. Monday Madness is better reserved for fact, but WWE is better reserved for free expression and some really fun conversations. Otherwise, we post plenty of content that you can be notified of on LinkedIn. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!