7/3/23
In this episode we get a little patriotic, talk about India’s yuan-strapped deals, and some production cuts coming from Russia and Saudi Arabia.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO writing, recording, and editing a brand new episode of Monday Madness on July 3rd, 2023. That’s right, this week our young country celebrates its 247th anniversary of gaining independence. Of course there was a short history of British rule preceding that, but the idea of breaking away from a tyrannical government that had no idea how the other side of the world lived is still badass. You think it’s difficult to communicate with politicians now? Imagine doing so with letters instead of e-mail and twitter, or having to sail the ocean to see politicians rather than hop a quick flight to DC. Despite having access to those modern conveniences it still seems like we are headed down a less than ideal path politically. Lots of “rules for thee yet not for me” and people who make a very glamorous and wealth riddled career out of being a politician. A different context than a revolutionary war, yes… but use the Fourth as an opportunity to be proud of the fundamentals this country was established on. Thinking independently, acting autonomously, and living free as long as you bring no harm to your fellow man. I think that is a very simple way to boil it down and it makes me feel very proud to be your fellow American. But I had better be careful and move on to the energy news. If I end up using “proud” and “American” too many times in the same sentence I’ll be accused of attending the January 6th event that is all too famous. Time to dive in!
Last week was a bit dreary by the time we hit Tuesday. What started as a price that climbed to $70 turned into one that cratered to $68. Still, not all was lost as it jumped back up to $69 by mid Wednesday and climbed about 25 cents everyday until Friday before closing at $70.70 as it fell into the weekend. I’ve talked about Monday volatility quite a bit in the past, and I’m able to get cracking on this episode early than usual today and that is exactly what we are seeing. A spike up to $71.73 and a dip down to $70.10 before coming back to where we are at $71 flat. No idea where it will finally settle out, but I have a good feeling this week. Sorry, I know that I usually have some more technical analysis, but this week I can simply chalk it up to feeling it in my bones. Besides, attributing it to an inventory report, large change in demand, or geopolitical event has been pretty damn inaccurate for most of this year (at least since we settled into this tight flat band of pricing. In recent weeks we have seen that the spread between WTI and Brent tends to land in the low to mid $4 range. The past several days have shown some strain between the two as they pull further and further apart. The spread is now at $5. Not a super significant spread yet, but it does bode well for WTI. If Brent gets too much more expensive, people will start importing more WTI. Think of it this way: You have a Walmart and Target near your neighborhood. The only difference is that the Target is right down the street, and the Walmart is a 10 minute drive away. You typically shop at Target because even though the prices are about 2% more expensive you can damn near walk to grab your groceries. If over the course of the year the groceries at Target became 12% more expensive than the groceries at Walmart, you might notice and start making the drive to Walmart to snag groceries. Yes the drive is longer, but you still end up saving quite a lot of money even after subtracting what gas it took to drive there making it worth the 20 minute round trip drive. This is exactly the calculus importers in Europe are going through when deciding where to get their crude. If Brent was $20 more expensive than WTI, everyone would be buying WTI because it becomes cheaper to ship it across the ocean than buy Brent locally. Like I said, a $5 spread ain’t too crazy, but it is certainly something to keep an eye on. Natural gas started to look like it would continue going upward past $2.80, but that just isn’t the case. It took a hard 20 cent fall, rose back up, and fell again to about $2.70 where we are today. If I had to predict anything it would be another week of stability at best before trending downward. This will be the fourth time we have seen that pattern since the prices took a tumble in January. Over the course of this month we will most likely see the price fall back down to $2.20. Nothing too exciting in the realm of commodities this week, so I impart this advice: patience will pay someday.
Next up is the rig count! Another large dip last week with 8 fewer rigs in the US leaving us with a total of 674. This time last year we had 76 more rigs. Strangely enough, all of the loss can be centralized to a few areas. The Eagle Ford was the only major basin to gain a rig last week. Otherwise, the Williston lost one, and the Haynesville lost 6. There is a little more variation at the state level. New Mexico gained 2 & Wyoming is up 1. On the negative side is North Dakota down one, Oklahoma down 2, while Louisiana and Texas are both down 4. No change in the gulf this week. We’ve seen a lot of rigs targeting unconventional reservoirs go down lately and that trend continues. This week it was almost all horizontal wells that were targeting gas. It is no surprise that rigs continue to get dropped considering just how long commodity prices have been stuck in this tight tight band. I imagine that this is only the beginning of a much larger fall off of rigs, but I really hope it has the effect of just pulling that slingshot further back. Not so much that energy prices are biblical (because of course that would hurt a lot of people), but enough so that we see those $100+ prices.
Our final weekly statistic to touch on is the inventory report. Nick Fernhuout is on a little summer vacay, so I had the pleasure of writing last week’s issue and enjoying a little wine spritzer with my data. If you have no idea what any of that last sentence meant, please visit www.rarepetro.com and check out our Thirsty Thursday inventory reports. It highlights important weekly inventory data and puts forth a ton of great visualizations of data from our favorite sources. If you don’t have the time to give that a peek, I’ll read some of the more interesting bits right here: We’ve got some great inventory news this week, and things were already getting exciting when the EIA predicted a 1.75 million barrel drawdown. Their actual recorded result far exceeded expectations as they reported a drawdown of 9.6 million barrels! That is the largest drawdown seen in a little more than a month. The API made a similar prediction for a 1.5 million barrel drawdown which was also a bit of an undershot, but not as much as the EIA. Their reported drawdown was 2.4 million barrels. The start of the year made it look like we were in for severe stockpiling of oil, but the past few months would lead you to believe otherwise. In fact, we have slowly been trending downward since then. No major changes in the world of gasoline. Pricing is essentially the same, and the domestic inventory remains very low compared to historical trends. In fact, we are only a few hundred thousand barrels away from being below the 5 year low for this time period. Despite that unusually low supply the price remains stable. Gas prices are actually down 3.5 cents, but don’t expect that to last for too long. The holiday weekend is ahead of us and it is possible we see some serious drawdowns as people plan to make the most of a potentially 4 day long weekend. That’s a massive potential for long road trips. Washington state leads the pack as it is 1.3 cents away from a $5 average gas price while Mississippi keeps it cool and under $3 at $2.978 per gallon. Diesel prices found a way to cool off by almost 3 whole cents despite distillates travelling sideways. That’s right, another slight 100,000 barrel build for a 3 week change of only half a million barrels. Despite the stability, distillates are still dangerously close to setting new record lows. Propane continues to skyrocket higher than it has been this time of year since at least 2018, so now is the time to stock up if you are looking to grill or heat your house for cheap.
I think that wraps up all of our weekly data. Next up we’ve got some news for ya. It has been a while since anyone openly traded oil outside of the dollar. A few months ago we talked about how both Saudi Arabia, Iran, and even TotalEnergies in France settled contracts in the Chinese yuan. Now we’ve got a new party playing that game who also happens to be a member of BRICS. India is now paying for Russian oil in yuan. This is worth noting because India is one of the top importers of Russian oil (in quantities similar to China) and their numbers keep on climbing. June imports of Russian oil hit a new record of 2.2 million barrels per day which also sets a record for the 10th month in a row. I’m sure that trend will continue for quite some time if both countries can facilitate it. Prices are low so India might as well stockpile, and Russia needs the funds badly after being banned from some of the most prominent methods of international payment. This may be a problem for the G7 as India is purchasing these massive quantities outside of the “agreed” price cap and I put that “agreed” in air quotes because 1. Neither India, China, or Russia agreed due to not being part of the G7 and 2. Because these countries represent large enough populations and global trade pools that they could simple give two hoots about what the G7 says. After all, price caps, embargoes, and sanctions are only effective if all parties observe them. Another thing to note is that it isn’t just rinky dink independents importing this oil. As of last month the Indian Oil Corporation, one of the largest state held Indian energy companies, is now in on the yuan business. This isn’t to say that they are aggressively diverting from the petrodollar. In fact, they prefer to trade in dollars, but if Western banks can’t settle the trades because of sanctions, then they have to go through other currencies which we have seen most popularly is the yuan, though UAE dirhams are popular as well. At this point we are forcing more business Russia’s way because of the sanctions, and China is benefiting. RARE PETRO predicted many months ago that Russian oil would find its way to markets. People need energy, so they will acquire it any way they can, especially when it is heavily discounted.
Next we have news of supply cuts, but not from OPEC as you may have guessed. This time it is Russia looking to influence markets a bit by choking back on exports. According to ex Energy Minister and present Deputy Prime Minister Alexander Novak, “As part of the efforts to ensure a balanced market, Russia will voluntarily reduce its oil supply in August by 500,000 barrels per day by cutting its exports to global markets by that quantity.” It is tough to predict exactly what that number means to the global market because Russia isn’t exactly reporting what goes out of their country, and any importers aren’t exactly honest about the origin of goods coming into their country. 500,000 barrels per day may not be a ton on its own, but even Saudi Arabia announced it would extend its 1 million barrel per day production cuts into August. Strangely enough, both of those announcements were within minutes of each other. Saudi Arabia has released an official statement that says, “This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC Plus countries with the aim of supporting the stability and balance of oil markets.” Russia is a plus member of OPEC, so perhaps it isn’t that strange after all. As a matter of fact, Energy Minister Prince Abdulaziz bin Salman referred to Russia specifically when referencing the last OPEC meeting and how they hope to achieve more interorganizational transparency on production data. These are some strong bonds being formed, and the harder we fight it, the closer they are pushed together.
Folks, I think that is all the time we have for today. I don’t want to keep you too much longer because I’m sure lots of you are on the road to 4th of July festivities. Get out there, have fun, and take the Tuesday to enjoy yourselves in the celebration of the one thing that unites everyone in this country. If you enjoyed today’s content, go ahead and follow the podcast! We are on every major streaming platform which makes it especially easy to share with a friend. We are absolute energy nerds at RARE PETRO and love learning as much as we can about this industry. If you’d like to join that ride, the tickets are free ninety nine and we would love to have you. All of our other content from podcasts, to videos, to written periodicals can be accessed on our website www.rarepetro.com. This has been Tavis Kilian, and until we see you next time, take care everybody!