In this week’s episode your host Tavis walks you through last week’s price swings, an update to the ocean fire, and Canada’s struggle to be green.
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian bringing you another thrilling episode of Monday Madness on July 12th, 2021. I hope you are all having fun in the sun now that we are deeper into summer. This past weekend I went up to Horse Tooth reservoir in Fort Collins to go stand up paddle boarding with my girlfriend around its edge. After about 30 minutes out on the water and maybe a quarter mile down the reservoir’s coast, a nice man in a Department of Natural Resources boat pulled up to let us know it was actually illegal to “operate a paddleboard” without a life preserver in the state of Colorado. Now I wanted to ask, “Isn’t a paddleboard a sufficient floatation device?” But thankfully, I decided to keep my smart comments to myself and the aforementioned nice man gave us an expensive citation and a free boat ride back to the crowded beach we launched from. Now, as a guy who grew up on the Mississippi river and a girl who has multiple years of experience as a professional raft guide: we were pretty pissed. But! Nonetheless, a law is a law, even if you didn’t know it existed, so hopefully I can save you a headache and a hefty fine with this story. But I know you didn’t come here to listen to me passively and aggressively complain about a government agent behind the safety screen of the internet, you came here to get filled in on all the biggest current events surrounding oil and gas, so let’s start with our statistics!
First of course WTI pricing. Once everyone got back to work last Tuesday, everyone was talking about OPEC’s failure to agree on production as Saudi and Russia wanted to extend the cuts, while the UAE said it was time to open the taps. The resulting frenzy pushed WTI to nearly $77 per barrel, before it started a multi-day downward spiral. It landed at almost $71 flat on Thursday, but spent the remainder of the week climbing up to the high $74 range. This morning it fell a little bit but has since bounced back. We are currently sitting at about $73.96. I want to point out that the price had many opportunities to dip below $70 on this news, but each time it fell that low it bounced right back up. Not only that, but the spread between Brent and WTI is only $1.14 cents at the moment. It continues to get tighter and tighter, which is usually indicative of some kind of instability. These two benchmarks are typically not worth the same due to their different chemical compositions and uses. Things are going to get a bit hectic in international markets if this spread continues to decrease as it is a huge fundamental factor for many.
Next, one of the best performing metrics of the year, the rig count! This week proves to be another good week with 4 rigs added domestically bringing the US total to 479 which is 221 more rigs than we had one year ago today. Funnily enough, none of the major basins saw much change. The Utica added a rig, and then it was pretty much radio silence for the rest. Not even the Permian saw any added rigs this week. If we look from a state perspective, we saw that everything is still big in Texas as they added two rigs. Otherwise Louisiana, Wyoming, West Virginia, and even Ohio added a rig each to their total with Pennsylvania being the only state to lose a rig. Dead even split between oil and gas for targeted fluids, but nearly all of those wells will be horizontal. Pretty standard stuff here. A little slow overall, yes, but still a move upwards.
Next we gotta check where we are at with our inventories. While it is definitely fun to hear it from me, I’d argue it is a little more fun to read on our website. Follow us on LinkedIn so you don’t miss the next episode of Thirsty Thursday, and you just might have the opportunity to have a drink as well. For those of you who missed it, the API seemed to think the days leading up to the holiday weekend would not make too much use of crude products or fuels as they estimated a drawdown shy of 4 million barrels. The reality is that they were, yet again, far too modest with their estimates as it was actually double the estimate of nearly 8 million barrels. The EIA ended up making a prediction that was slightly larger at just over 4 million barrels, but their actual report revealed that just like the API, they are far too modest as they revealed drawdowns of 6.9 million barrels. The EIA’s numbers show that we are down nearly 48 million barrels in 2021 alone, even with those massive builds in early March. Two weeks ago we saw a minor drawdown in gasoline inventories. Last week was a kick in the pants with a small build of 1.6 million barrels that put gasoline right in the middle of its historical 5 year range. This week however saw an inventory draw of 6.1 million barrels! This is the largest gasoline draw we have seen since about February of this year. In other gasoline related news, the president urged OPEC to open its taps despite doing his damndest to limit oil production domestically. Why, you ask? In order to obtain, “affordable reliable energy, including at the pump.” Until OPEC gets their act together and figures something out, Biden has decided to take matters into his own hands and end $90 billion worth of tax breaks for oil and gas companies in order… to… provide America with more expensive gasoline and energy? I don’t quite understand that one. Either way, huge draws on crude and gasoline, and it is quite possible that the next inventory report will reveal propane is lower than its five year average, so good news here, and now that I’m thinking about it, really good news all around. Sustained $70 barrel, more rigs, and less stock stored away in our inventories.
Next we’ve got some current events to catch you up on. First we’ve got quite a bit of news about Pemex and Mexico. Pemex released a statement in regards to the ocean gas fire we saw a little over a week ago. Apparently, there was an electrical storm accompanied by heavy rain near the platform which it said caused pneumatic pump gas turbo compression equipment to go out of operation. As soon as that happened, a leak was detected in the same pneumatic equipment that was in disarray which allowed gas to travel up to the surface of the ocean, only to be ignited by the electrical storm. To me this situation sounds incredibly unlucky and still a little fishy. I’m sure failure for some of the pneumatic systems could have caused the pipe to burst because that “leak” as they call it was massive and would have been detected earlier. Still, their awful track record that we reviewed last week leads me to believe there were still actions and policies that could have prevented this accident. Either way, they were able to get it under control in a short 5 hours, so perhaps this situation will shed some extra funding on the facility to make sure an accident like this never happens again. In addition to this announcement, we also have some midterm election insights for Mexico. Right now, President Obrador is running the show, but midterm results show his ruling coalition could soon lose control of the qualified majority in the lower house of congress. If the support falls from qualified majority to a simple majority, it will prevent President Obrador from being able to push sweeping legislative or constitutional reforms like he did with the Zama Oilfield. A private US-based consortium led by Talos Energy discovered significant reserves in the field. Unfortunately, 40% of the reserves run into a territory that is already operated by Pemex, and this is why Obrador awarded his own country almost half of the spoils. If this is to continue, it means no private operators will want to explore and experiment within the territory of Mexico as they risk losing everything they may have worked for. While this is only one of the issues revolving around the transition to a simple majority, it is likely going to cause some big changes for the country.
Since we spent time talking about our Southern neighbors, we may as well head on over the other border to the North into Canada. Several industry executives are weighing in on what they believe is required to make Canada’s oil extraction more green. Fortunately, there is a consensus on the cost. Unfortunately, that cost is quite high. Right now, Canada has to put a significant amount of energy into extraction and processing of the hydrocarbons in its tar sands which make its emission heavy. There is hope with the implementation of carbon capture, utilization and storage, but those systems have the hefty price tag of $60 billion dollars if implemented before 2050. The CEOs of both Suncor and Cenovus energy mentioned that operators in Canada are going to need the government’s help to fund these projects should anyone hope for them to finish. Both companies are working together on the net-zero carbon initiative to reduce the impact operators have in the tar sands. They mention the transition “will require significant investment on the part of both industry and government to advance the research and development of new and emerging technologies.” I don’t know where you see this going, but I know the United States government would be hesitant to shell out that much money for oil and gas. While it is for a great cause, it certainly has a high cost, and I will be excited to see where Canada has gone with this project in 5-10 years from today. Either way, they know something has to be done, it just might come at the cost of much more expensive energy that is subsidized by consumers who use it. You can say what you want about the energy transition, but we can all agree that it is anything but boring.
Unfortunately, this is the end of our time together. Yes I know it was fun, but believe it or not, RARE PETRO does other things besides content generation, so I’ve got other work to do. If you’d like to see what other engineering and tech services we offer to the thought leaders within industry, please go to rarepetro.com. While you’re there, we have plenty of other content to feed that insatiable hunger for knowledge on oil markets and current events. If you can’t find what you are looking for with the search bar, please send us an email at podcast@rarepetro.com and perhaps we can put together a little segment on something of your choosing. Thanks again for tuning in. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!