Monday Madness: July 17 ’21

Posted: July 19, 2021

Join your host Tavis as he soothes your worries about WTI price, talks OPEC’s newest agreement, and discusses why oil may become more scarce (and expensive)!

Audio Transcript

Alrighty everyone, welcome back to another episode of Monday Madness! This is Tavis Kilian with RARE PETRO recording on the morning of July 19th, 2021. Last night I had a dream where I was going about everyday life. Nothing out of the ordinary. I checked my phone and oil was at $83 a barrel. It didn’t seem too far-fetched, and it was exciting to witness! Got me excited to continue to work in the energy industry. You can imagine my surprise when I checked the prices coming into work this morning and saw the actual result… whoopsie. I can confidently say I didn’t jinx the prices as we have many variables to consider that we will dive into very soon. But, I know you didn’t come here to listen to a junior engineer’s dream journal. You came to see the hottest news and learn about some of the most revealing statistics in oil and gas, and that is exactly what we will do!

Like I mentioned, WTI is not doing so hot this morning. Last week, we saw prices of $75 at the start of the week before it dipped to the $71-$72 range. Once we came out of the weekend, there was a heavy dip through this morning to about $67. It seems like there is a hard floor as it keeps rebounding off of that point, so at least we have that going for us. I have news stories for later that definitely factor into this new low price point, but one of the biggest factors relates directly to the market. Now, I know RARE PETRO doesn’t take too much time to talk about stocks and money plays. Just skirts the line of legality as we aren’t exactly financial advisors, and we don’t want to say “buy x sell y.” However, I am able to talk about macro trends, and that trend is easily summed up by the word “red.” The Dow Jones Industrial average dropped as low as 850 points for the worst fall so far this year. Sounds pretty doom-and-gloom-y but keep in mind this is only about 2.5%, exceeding the 2% dip we saw back in January. If you do some quick googling, you will see that many agencies are attributing it to a rebound in COVID cases thanks to the new Delta variant. Others will report that the 10 year treasury yield has also fallen to a new five month low of 1.19%. As you know, it is kind of difficult to attribute what is the cause and what is the effect between all of these variables, but there is one easy thing to understand: When markets are down bad, most everyone suffers. A big red day like this drives most everything down with it, especially commodities. WTI is now down almost 7%. Metals remain mostly unaffected, but grains like oats & soy are also down more than 1%. Coffee, cotton, and corn are up a bit, but not significantly. Pretty much every benchmark for oil is also down at least 5 percent, so really this looks like a lot of that Monday volatility. I’m not going to say that international markets are healthy and functioning normally, but I will say that RARE PETRO has spent more than a year now publishing content which justifies an increase in the price of oil, so I think this is just a temporary dip. It may not be easy getting back to $75, much less through it, but the biggest tool we have now is patience. Sit back, relax, and let time do its thing, and we should be above $67 barrels relatively soon.

Next statistic of course is the rig count. Companies haven’t had time to react to this shock in pricing quite yet, so I initially anticipated we would see our regularly scheduled build. Thankfully my intuition was correct as we saw 5 more rigs go up in the United States bringing us to a total of 484 rigs which is up 231 on the year. Basin by basin, the Permian is back to business as usual with the addition of a single rig. The Cana-Woodford and Granite Wash however, each lost a rig. A state perspective shows that Wyoming is putting up big numbers with the addition of 3 new rigs. Oklahoma follows in a close second with two rigs, and Alaska and Louisiana were able to bring up the rear, adding one. Despite the Permian observing small growth, Texas as a whole lost 2 rigs making it the biggest loser of the major energy producing states. Of the 5 new rigs, 3 are actually drilling vertical wells, which is a bit peculiar as it boosts that population by 20% to 18 total rigs. I would imagine there is likely one or maybe two organizations responsible for this as it is quite peculiar. Additionally, it seems that 3 of these rigs will be targeting gas versus 2 targeting oil which is again, slightly disproportionate in change we’ve seen from the past. Regardless of whatever whacky projects may be kicking off right now, we are still up 5 rigs, and that is great.

The last thing to touch on before we get into our stories is the inventory report. If you missed RARE PETRO’s “Thirsty Thursday” report from last week, go ahead and follow us on LinkedIn so that doesn’t happen again. You don’t want to be left in the dark, and it is generally a whole bunch of fun to read through. If you are skeptical, you might as well give it a peek before you claim I’m overhyping it! Anyway, the API wins the award for accuracy this week as they predicted a 4.3 million barrel drawdown and saw a 4.1 million barrel drawdown. This is the first time the API saw results lower than their forecast since June of this year. The EIA predicted a slightly larger drawdown, and that is exactly what they saw with a reported 7.9 million barrel result. This is now 7 straight weeks of drawdowns of at least 5 million barrels. Still, the massive crude draws are contrasted by a 1 million barrel build in gasoline inventories which means that refiners were likely prepared for everyone to return home from that fourth of July weekend. Distillates inventories remained about as interesting as watching grass grow, but propane was 154,000 barrels shy of setting a new record low in its five year history, so it could drop even further with the next report. The big draws on crude are the headline grabber here, so let’s see if that record continues in upcoming weeks.

I’d chalk this week up to “okay.” Big Monday swings in all over the market did force WTI prices down a bit, but the rig count and inventories gave us something to be happy for.

As for the stories, I’d like to talk about another major factor putting a significant amount of downward pressure on WTI pricing. OPEC plus finally reached a deal regarding production cuts that should add another 400,000 barrels per day starting in August. By that I mean, all of OPEC will boost the worldwide production for the month of August by 400,000 barrels and then again hold steady. If everything goes well, the group should meet again near the end of August to decide if they should add on an additional 400,000 through September, and ultimately every month after that. This decision came as a compromise with members like the UAE wishing to produce more while others were more comfortable even sustaining these cuts. This new plan should return the world to pre pandemic levels of oil production by the end of 2022. Now, if those COVID headlines I mentioned before lead to even more shutdowns and limit travel, I think OPEC would have to reevaluate their decision once again as we may see a miniature version of 2020 once again. Fortunately, the US can probably continue to do what it has been doing, and inventories will be even further depleted, assuming demand doesn’t fall too much. At the end of the day, we aren’t out of the woods yet, and there are just too many variables. One thing that is for certain is that we energy workers will likely not be bored in the coming years as gas gets more expensive, and energy blackouts more common.

Keeping on the theme of news to influence the future, the WSJ released a phenomenal article at the end of last week titled, “Wall Street Opens Back Up to Oil and Gas but Not for Drilling.” Seems a little counterintuitive, no? Let’s hash it out. Back at the initial shale boom, most would agree that producers were lent far too much money to put towards projects that offered very high returns initially, but petered out quickly. The result was that a lot of that investment money went into drilling more and more shale wells to support the portfolio. Well, of course, that didn’t end so well, and it left a lot of companies heavy with debt. Today, we are seeing many oil and energy based companies issuing bonds at a record pace which has raised about $34 billion so far per data from S&P Global Market Intelligence. Laredo Petroleum is an independent company in Tulsa who issued $400 million in bonds due for repayment in 2029 at 7.75%. In the past this money may have gone into new wells, however, Laredo has made it clear that they plan to use this money to pay off other debts. Since companies have seemingly learned from years past, there is not a lot of money that is going towards raising output or replenishing inventories. This results in a narrower spread between the supply and demand of crude oil domestically. Some speculate that this is just companies responding to a future that will require less oil. Perhaps they are right, as the gap between yields on US dollar bonds issued by energy firms and supersafe treasurys is shrinking. In layman’s terms, people are feeling that lending money to energy companies is becoming less risky than it has been seen in the past. This is likely because 88% of these bond sales from energy companies have gone right back into paying down debts maturing soon. Pretty significant especially when compared to 65% back in 2015. Not only are companies issuing bonds, but they are acquiring each other and selling assets to turn a profit to, you guessed it, pay down debts. Pioneer and Diamondback alone raised $2 billion following some of their huge acquisitions. Now, why am I bringing all of these numbers and mumbo jumbo up? Let’s just look at Occidental Petroleum. Recent reports show that their net debt is still as high as $35 billion thanks to the acquisition of Anadarko. A portion of that debt is maturing now, so they sell some properties in order to raise capital to pay off the debt rather than continue exploration and production. Do you see the problem here? Upstream sectors are lagging in investment when compared to midstream and downstream, and the money that does make it to upstream is being used to pay debts rather than continue the supply of oil. 7 weeks straight of more than 5 million barrels in drawdowns sounds like no coincidence to me, so it is not only possible, but likely that oil is going to become increasingly scarce, and more expensive.
But again, that is just a little bit of hypothetical extrapolation, or as they call it in the biz, speculation. Be sure to voice your own opinions by emailing us directly at podcast@rarepetro.com, especially if you think I have gone off the rocker and been making baseless claims. We would love to feature your opinion on the show, and you will be entered into a giveaway for some RARE PETRO swag for having the gusto to communicate with us. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody.

Music: https://www.bensound.com/royalty-free-music

Related Tags: debt | investment | markets | upstream | WTI

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