Mysterious rig builds, Germany soothing fears over surge in coal use, and China choking out their fuel exports. It’s Monday Madness!
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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 July 18th, 2022. The weather this past weekend was phenomenal! Though it was hot, it was such a great opportunity to get outside and get some sun. I went golfing with a few of my friends on Sunday, and it got heated at the end! But, I can’t really blame anyone. Imagine having a phenomenal drive and a great approach that lands perfectly on the green… where the pin used to be. That’s right. The course changed its flag location and moved it to a nearby green on the left. Completely different than what the map read. Fortunately, it wasn’t me that experienced it, rather than one of the others in the group. I was able to salvage one of the better drives of my life and make a wonderful approach to the other green, but Jim if you are listening, I gotta say I would not have blamed you if you tore up that other green and got us banned from the course. But you didn’t come here to listen to the stories of a group of degenerate golfers, you came here to get the scoop on the biggest oil and gas news and the best data analysis the podcast space has to offer.
First, we start with commodity prices. Last week WTI was coming down from over $100 prices. This week it is headed above $100 prices. Brent is also maintaining its $3-$4 lead as it trends upward as well. I’m not sure which direction these commodities are headed, but I would not be surprised if we returned to $120 anytime soon. Winter is fast approaching, and folks are worried about securing good enough supplies to weather the storm. The most valuable of the winter commodities seems to be natural gas. With growing fears of securing enough supply internationally and a hot hot week domestically, natural gas is back up to $7.50. Not bad considering we were only at $6.50 this time last week. In fact, $6.50 was about the number for natural gas last week as it remained there as late as Friday. Mondays are incredibly volatile and a 15% over the weekend price increase is likely going to get snuffed out by the end of the day. I imagine that price will settle in the low $7 range by end of day. Still, a positive week for commodity prices which just means gasoline may go right back up to where it was.
Next up is the rig count. Overall we are up 4 rigs on the week bringing us to a total of 756 which is 272 more rigs than we had this time last year. Like last week, this report is pretty quiet. Basin by basin is the granite wash that steps up and tacks on 2 new rigs bringing them to a total of 5. The next best was the Eagle Ford who added 1 bringing its total to 69. Nice. The Haynesville was the only major basin to lose a rig. Otherwise, the rest of the country is quiet. If we look at it state by state, Texas is clearly leading with 4 rigs. Oklahoma follows with 3, while Cali and North Dakota bring up the rear with one each. New Mexico lost 2 rigs, and Louisiana is down 3. The offshore environment is in the same boat as Louisiana as they also lost 3 rigs. So overall that’s 7 new land rigs and 3 fewer offshore rigs. The most interesting data point is the fact that these 4 net new rigs will be targeting an even split of oil and “miscellaneous.” That’s right, 2 new miscellaneous holes doubling the total. What exactly does miscellaneous mean if it is not oil or gas? Is that helium? Rare mineral saturated fluids? Funky test wells for new sequestration technology? I’ve got absolutely no clue, but it seems someone is drilling either horizontal or vertical wells for a non-hydrocarbon reason. Either way, another modest but positive rig count that I am happy to see.
Lastly, we have to take a look at domestic inventories. If you missed the latest Thirsty Thursday report I can get you all caught up, though I have no drink left to share with you. The world watched and held its breath as the EIA released its most recent report. After the last report’s 8 million barrel build, no one was sure which way domestic inventories would go. The EIA predicted the smallest of drawdowns at 150 thousand barrels. The reported build was not as large as before, but still significant at 3 and a quarter million. The API came out swinging with a much more positive prediction of a 2 million barrel drawdown, but they actually reported a larger build than the EIA by 1.5 million. While this build brings down commodity prices a little bit, it also pushes US crude inventories further into historically normal territory. While still close to the lower boundary, the inventories should progress closer to the center if they can at least maintain current levels. Otherwise, winter could prove to be difficult starting sometime around November. Until then we will have to see if we are in for more weeks of builds. There’s been another big build of gasoline. The 5.8 million barrel build is going to be useful in bringing down short-term gas prices, but it still leaves inventories about 5% below the 5-year range. While many are celebrating the success of the Biden administration SPR draining and proposed tax holiday, the bigger driver here is most likely the drop in commodity prices. $120 oil was the norm a couple of weeks back, but we now find ourselves closer to $100. Should commodity prices go back up, expect gas prices to also go back up. Gas prices are now down about 40 cents on the month. This temporary reprieve was much needed, but no one can be certain how long it will last. More and more gas stations are able to sell gasoline for less than $3.99 with the state of Georgia having the lowest average state price at $4.115 per gallon of regular. California is home to the highest at $5.991. Both distillate and propane inventories increased last week (though you would expect it for this time period), but they both remain lower than the historical 5-year range. A year ago today distillates were trending downwards into historically low territory. Now it is trending upwards while in historically low territory. “Historically low” seems to be one of the most common descriptions we see attached to commodities these days.
…aaaand that wraps up our weekly statistics. Now it is time to look at some current events. We’ve got some really hot stories this week, though I have saved the good stuff for today’s recording of the Wacky World of Energy with Anthony. If you haven’t watched one of those on YouTube or listened to the podcast yet I highly recommend you check it out. Otherwise, we also have a few stories for today that are a little less spicy and a little more rooted in fact. We will start with an update to Germany who seems hell-bent on regressing to the energy landscape of 1960. As Russia cuts off more and more of Europe from receiving gas supplies, its biggest customer is doing its best to soothe fears. German chancellor Olaf Schulz said that the reactivation of lignite and oil-fired power plants is only temporary. He said, “The fact that because of Russia’s brutal attack on Ukraine we now have to temporarily use some power plants that we had already taken out of operation is bitter but it is only for a very short time.” Though I would put more blame on Germany for relying on Russia for 40% of its gas deliveries, the world’s sanctions surely aren’t benefiting energy security in Europe. In response, Germany has restarted 16 mothballed hydrocarbon power plants and extended the operating licenses of 11 others as it hopes to conserve gas by burning coal and oil. That is right, in order to make sure they don’t use up all the abundantly available natural gas resources, they are pivoting to dirtier and older forms of power generation. While it will do wonders for protecting their economies, it will certainly be difficult to transition away from “fossil fuels” as they call them. Even the head of the German Federation of Trade Unions is concerned as earlier this month he said, “Entire industries are in danger of collapsing permanently because of the gas bottlenecks: aluminum, glass, the chemical industry.” That is the reality of not having enough energy supplies secured, and outsourcing hydrocarbon production has been a great way to ignore that in the past. Sure, Germany has a ton of great renewable energy infrastructure in place and regularly brags about it, but it don’t mean diddly squat if you have no hydrocarbon baseload. We even talked about this in last Week’s Wacky World episode as France is refitting its power infrastructure to be functional with coal and oil. Our lifestyles are supported by hydrocarbons, and that is something more of the world is recognizing every day.
Next up we look at China slowly choking out exports from their country. If you didn’t know there is a mix of government and “private” industry in the country. Now if this was a video podcast, I would have hit you with the air quotes when saying “private” because all decisions from those companies are still controlled by the CCP in some capacity. The hottest topic as of late relates to fuel exports. Gasoline exports are down 42% annually for half one of 2022. If you think that sounds excessive, know that diesel is down 84% from last year. Though the government issued its latest batch of export quotas, total quotes for this year are down 39% from where they were at this point last year. As Reuters notes, this still allows enough export for refiners to make money on sales to international markets, but not enough to have a positive impact on the global supply crunch. While some folks feel this is China doing its best to profit just a bit and keep commodity prices high (and keep energy prices high in unfriendly countries), China has stated that they asked refiners to slow their roll on fuel exports in April due to concerns of oil supply. A funny notion once you consider that they are one of the largest importers of cheap Russian fuel, but I will allow you to draw your own conclusions from the facts we’ve laid out. The US has been importing loads of fuel amidst our record high gas prices, so let’s hope that we weren’t too dependent on China to meet our gasoline and diesel demand as we lose more and more refining capacity.
Current events are framing some very interesting conversations around how we get our hydrocarbons, where we get them from, and how they are used. It seems that those with energy resources will benefit and can aid those who don’t but the American political climate has left these policies in gridlock. Whether that is the presidential administration performing a balancing act between appeasing voters on climate policy and securing energy resources, or the Supreme Court ruling that the EPA has overstepped its bounds, we have lots of stakeholders that have ground the energy transition to a halt. We’ve got some important questions to consider, but I think the United States can emerge stronger from this experience.
But that is all I have for this episode! Remember to frac that follow button on whatever podcast platform so you don’t miss out on any of the content we release. As I mentioned, we got a great episode of the Wacky World of Energy coming out later this week, so keep your eyes peeled! Otherwise, we put a bunch of other content on LinkedIn should you choose to follow it. This is Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!