A spread for the record books, diminished gas deliveries, and Trudeau’s inability to recognize the pattern.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you a new episode of Monday madness on July 25, 2022. Now I only bring this up because I know lots of our audience is in Denver, but just yesterday I stopped by the Denver Art Museum. While they had several other awesome exhibits, they had a rotating collection from Worcester, Massachusetts. What exactly was the art? Different sets of armor from all over the world from as early as the greek helmets of 450 AD to the wackiest items like the English gun shield of the 1500s. I was like a kid in a candy store, between the functional war pieces that weigh 80 pounds and the ornamental officer sets from periods of peace. But I’m losing focus here. This isn’t a historical podcast looking at the intricacies of self-defense across the ages (though that would be really cool), this is the RARE PETRO podcast where you come to hear the hardest-hitting news and most revealing statistics within the world of energy.
Let’s start by diving into, you guessed it, commodity prices. We are back to some pretty crazy volatility as energy resource availability is threatened by Russia’s willingness to distribute them. WTI spent most of last week above $100 per barrel before falling early Thursday morning to $95 which is about where it remains today. Still, it is very early in the day and Monday mornings are incredibly volatile so anything is really possible. Regardless, the most important data point to consider here is the WTI-Brent spread. When Brent becomes too expensive, oil importers switch to importing WTI barrels because they become cheaper despite the increased delivery distance. This usually occurs when Brent is $5 or $6 dollars more expensive than WTI causing a comparative increase in WTI price. This little tug of war typically keeps Brent about 3 and a half to four dollars more expensive than WTI. Today that gap hit a high of $8.50 per barrel meaning that all eyes are now on the US coasts to save a little bit of money. This is one of the highest spreads we have seen since 2019, which was a pretty typical year for energy. Keep an eye out for the EIA and API’s inventory report in the coming weeks as there could be some interesting data and conclusions hidden inside. Another point of importance is the natural gas rebound. About a month back it had hit a low of $5.50, but week after week it makes insane gains – I’m talking as much as a dollar in a matter of days! Right now it sits at $8.644 and I think there is plenty of room for it to climb as Russia teases lower gas flows. Again, Monday, and we are dealing with an absurd amount of volatility so anything is possible. A great week for commodity prices (assuming you have a lil bit of skin in the game).
Next is the rig count which also brings good news. We are up 2 rigs as of the latest report, and some of the finer details are a bit surprising. Basin by Basin the Cana Woodford takes the lead with a 2 rig gain. The Eagle Ford and Granite wash follow with 1 each. The Permian actually lost a rig for the first time in months, and the Ardmore Woodford lost 50% of its rig fleet lowering its total from 4 to 2. State by state Alaska and Louisiana are the top dogs with 2 more rigs each. New Mexico and Utah are each down 1. These new rigs will be targeting more gas than oil and drilling an even split between horizontal and vertical hole. Even the Gulf of Mexico was able to bring its total up by one rig, so overall a good week! This leaves us at a total of 758 rigs which is 267 more than we had this time last year. A nice healthy count that you love to see.
Our last statistic to visit is the weekly inventory data. As I’m sure you know, you can dive into data and graphs by reading the newest edition of Thirsty Thursday online, but if you don’t have the luxury of time I can get you caught up real quick. The EIA’s spirit was broken after 2 weeks of significant builds. They ended up predicting a more than one million barrel build, but the actual results show a nearly half million barrel drawdown. The API expected a smaller build of 333,000 barrels. Unfortunately, they ended up reporting a build of nearly 2 million barrels. The EIA’s report of a half million barrel drawdown is not bad, but it certainly doesn’t do a lot to compensate for the 10 million barrel build in the previous 2 reports. While we are now back into the historical 5-year range, we are not that deep into normal inventory levels. A sudden shock could very easily wipe away that base. The current trendline seems to suggest that oil prices will trend upward ever so slightly. There’s been another build in gasoline, though it is smaller than the previous weeks. The 3.5 million barrel build is still significant as it brings us right up against the lower domain of the historical 5-year range. Should we see another build of this magnitude, we might be right back to normal. This is largely in part due to the reduced commodity price making materials much more accessible and profitable for refiners. Distillates are perfectly tracking the historical range, just from the outside of the territory. The seasonal build is to be expected though the magnitude is not enough to stabilize things. Propane could fall further and further out of the historical range through winter, but it could just as easily get back to normal and hold steady.
But that wraps up the statistics. Lots of strange occurrences, but these are a strange set of circumstances to navigate. Next, we need to look at some current events. We will start with an update to the Nord Stream situation. Maintenance was scheduled to end last Friday. It did, but Gazprom warned that a vague problem with one of their turbines will cut deliveries from 40% of capacity to 20% of capacity this Wednesday. This has thrown Europe into a frenzy as it raises many problems. This impacts the future as gas storage is imperative for navigating the winter, and many countries are low on supplies. This also impacts the present as countries will have to decide how exactly gas resources are to be allocated. Berlin is starting to come up with some plans to ensure consumers and hospitals in the country will have guaranteed access to gas supplies, but other critical sectors may be left short. If the chemical industry was not able to receive necessary natural gas resources, production in the sector would be halted as jobs are cut and supply chains are further disrupted. Coal and oil are now given priority on railways in Europe, but that means we are actually regressing in our energy transition. Some folks think that Russia is full of it. Many European officials have accused Russia of using the pipeline as a tool for geopolitical leverage. Even the Wall Street Journal noted that the Nord Stream contingency system is incredibly elaborate with at least one spare turbine available at all times. Russia denies these accusations and highlights its role as a country that affords energy security in Europe to a large extent. I think this story will continue to develop throughout the week, so I would keep your eyes peeled for any new news that breaks on Wednesday morning.
Next, I would like to talk about policy-making in the Canadian space. David Blackmon posted an article to his LinkedIn from his substack page titled “Sunday’s Energy Absurdity: Justin Trudeau Uses Sri Lanka as a Fertilizer Role Model.” A wonderful article that you should take the time to visit as Blackmon does a great job at highlighting glaring inconsistencies in policy in his “Energy Absurdity” series. But first, we should establish a little bit of background. In early 2021 Sri Lanka began to have a serious problem with foreign currency shortages. In response, the government tried to intervene by stimulating domestic consumption. As Sri Lanka has a massive agriculture sector this meant that farmers were commanded to source local and organic fertilizers rather than importing from abroad. This even appeased some climate goals as this followed the advice from the World Economic Forum report titled, “How to Fight Climate Change in Agriculture While Protecting Jobs.” In this report, they highlight that a large portion of nitrogen-based pollution is a result of using inorganic fertilizers produced at a mass scale. Unfortunately, the WEF was full of it and Sri Lanka now had to deal with a worsening currency crisis and now, diminished crop yields due to the lack of fertilizer. That is when the people started to revolt because inflation got so expensive that the government said it would only sell gasoline for “essential” services. See once you start to touch people’s food, money, or energy they tend to get really angry. Look at the pictures of the Sri Lankan riots.
I believe that gets you most of the details to understand our current story. Trudeau has apparently not read up on the Sri Lankan debacle as he plans to move forward with a cap on nitrogen emissions by reducing fertilizer use. More than 1 minister of agriculture from Canadian provinces have voiced their displeasure with the Saskatchewanian minister going as far as to say, “We’re really concerned with this arbitrary goal. The Trudeau government has apparently moved on from their attack on the oil and gas industry and set their sights on Saskatchewan farmers.” David Blackmon predicts that this will result in lower Canadian crop yields, damage Canada’s food export industry, and ultimately contribute to growing famine worldwide as supply chains remain absolutely and utterly busted. I have to agree with David, and the whole thing is exactly what he calls it: an absurdity.
As the world chases an aggressive reduction of carbon emissions we are witnessing a number of strange events. Countries return to coal and oil power production as they lack energy independence. Grain yields worldwide are falling and threatening the lives of millions. Power is being rationed for industries that governments deem “necessary” as we stare down the barrel of a potentially bleak winter. Investors are bailing on conventional energy as the next big thing is government-subsidized green projects with the potential for little to no return. Existing conventional energy companies lack the funds to put towards exploration and production as demand continues to grow. I know I’ve only listed the cons of the energy transition so far, but this short list seems to vastly outweigh the pros afforded, and I am really surprised more world leaders are struggling to understand that. RARE PETRO works hard to dig in and do the dirty work to find you the stories that are worth turning your attention to. If you educate yourself, this energy shortage could prove to be an opportunity for you, though it will certainly come at the cost of many, many lives. Power will be in short supply and people need heat. Food will be in short supply, and people need to eat. Those are the hard facts, and I am very happy to live in a country with abundant energy resources for when the times get tough.
A bit dystopic, yes, but these are the stories that need more eyeballs. We will continue to deliver you more content than you could ever want to read, watch, or listen to, and you can keep up to date by either fracking that follow button, or by following us on LinkedIn. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care, everybody!