Monday Madness: July 6 ’21

Posted: July 6, 2021

In this episode of Join your host Tavis as he discusses revealing statistics, Mexican disasters, and the future of oil investment.

Audio Transcript

Alrighty everyone, welcome back! Hope you are all well rested after the long weekend and eager to get back into the swing of things. This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on… Well… Tuesday July 6th, but the information is going to be useful nonetheless. If you haven’t already subscribed to this podcast on whatever platform you listen through and followed us on LinkedIn, go ahead and do that so you can stay up to date and informed on all things oil and gas. But I know you didn’t come here to listen to our self promotion, you came here to learn about the biggest things in the energy space that went down in the last week, so let’s get to it!

Our first item of importance: WTI prices. After last Thursday prices hit $75, and pretty much stayed there. Then, this morning happened. Very early this morning the price touched $77, but it then immediately plummeted down to $73.50 which is where it sits at the time of recording this podcast. Those of you who regularly trade, or who have been listening to this podcast for a while know that Monday volatility (or Tuesday in this case) is totally normal. Still, a drop of this magnitude is a little concerning. Nearly 2.5% change? That is super significant, and almost leads me to believe fundamental factors are bucking back against a seemingly over inflated price. I predict that the price will bounce back to about $74 by the end of the day, but would not be surprised if we sat near $73 for the first part of this week before returning where we once were. Even though it was a violent reaction following a $77 test, I believe the value is truly representative of the comoddity’s worth. A year ago today prices were only $40.62, so a fall to $73 isn’t the end of the world.

Next I’d like to take a moment to talk about the rig count. The first half of 2021 showed us that the rig count has no problem with steadily increasing, so I hope the second half fares just as well. Fortunately, Baker Hughes most recent rig count reveals another build of 5 rigs for the US. Basin by Basin we saw an additional rig in the Permian, Williston, and Marcellus basins, but the big winner turned out to be the DJ basin who added 2 more rigs bringing its total to 11. Is the newly formed Civitas getting busy? Are private operators trying to capitalize? That we don’t know yet, but regardless, a great development for Colorado as the state total went up 3 which insinuates it is not just the DJ seeing some action. All other major energy states saw no change or the addition of another rig outside of Wyoming who lost a rig bringing their total to 9. If you were to guess that the wells being drilled are horizontal and targeting oil, you would be correct! Still a violent shift away from vertical as the total falls from 19 to 16 nationally. A rather uneventful rig count, but stilla good one to see as the overall total continues to creep up.

Lastly of course, the inventory report which you could have already known had you read last week’s Thirsty Thursday! Seriously, it is fun stuff to read, and affords you an excuse to drink at work. If your boss catches you, just call it professional development and crack another one open for them as well. But, for those of you who missed it, I’ve got two words for ya: “Massive drawdowns.” The API seemed to realize that their past estimates were far too modest and predicted a 4.46 million barrel drawdown to up the ante. The actual report showed that they are still shooting way too low and the drawdown was over 8 million barrels. The EIA made a similar prediction of a 4.68 million barrel drawdown, but they too were shy of the actual estimate of 6.7 million barrels. Even though the numbers may vary a little more than we’ve seen in the past few weeks, this is still phenomenal news. That’s 5 straight weeks of drawdown of at least 5 million barrels AND 10 straight weeks of drawdowns in general. Last week we saw a minor drawdown in gasoline inventories, but prices went up nonetheless. This week we see a small build of 1.6 million barrels that puts gasoline right in the middle of its historical 5 year range. Despite gasoline hitting prices we haven’t seen in 7 years, it continues to get more expensive. The average national price is now more than $3.13 per gallon. Propane and distillates remain overshadowed by the much more interesting gasoline and oil, but it is business as usual for those two. Both remain within their 5 year historical range, but propane is dangerously close to breaking out of its cage.

If you ask me, that seems like a pretty good week by the numbers. Sure, WTI price fell just a little more than we would have expected, but the rig count is strong, and the inventories are decreasing. How’s about we get into some of the news?

I’m sure some of you have already heard about this one, but it is too big not to cover. We are going to talk about the Mexican gas leak. Now, if you got through this weekend without hearing about it, just google “Mexican ocean fire” and you should be able to find some pretty incredible pictures that almost immediately went viral. On Friday, the state owned Pemex reported a fire in the ocean about 1300 ft away from one of their production platforms. Apparently it was a result of a “leak,” but that seems like too insignificant of a word to use in this context. Fortunately, no injuries occurred and the fire was extinguished in about 5 hours after closing the 12 inch pipe and introducing nitrogen to the underwater fire. Pemex said they will begin an investigation into the cause of the fire soon, but the world is already furious. Sure environmentalists will lock onto a story like this instantly, but this is not the first time Pemex has had a disaster. They are notorious for poorly managed assets. In 1979 they were responsible for one of the largest oil spills in history. In 2012, an explosion at a gas plant killed 30 and injured 46. In 2013, an explosion in an administrative facility killed 37 and injured 126. 2015, platform fire, 4 dead. 2016 chlorinate plant explosion, at least 28 dead. 2019, pipeline explosion in village, 137 dead. Their track record is horrendous, but they somehow continue to operate. If anything, it highlights how fortunate we are to have privately run companies all over the world. Not to say that they don’t have their incidents, but it definitely appears to be safer and more successfully regulated if the government isn’t at the wheel. But still, these incidents occur, and the Mexican energy ministry has just awarded one of the largest private field discoveries to Pemex over a territorial dispute. That is like being the sheriff, judge, and mayor in a case against a visiting entrepreneur while the park down the street is on fire from poor community leadership. Mexico is clearly putting profit in front of safety and responsibility, which is an image most of the industry has been trying to get away from in the modern age. As I read through comments over the incident, nobody mentioned Mexico and their poorly managed assets, they only mentioned “Big Oil.” Again, not trying to dismiss what happened as insignificant, just trying to highlight Mexico’s poor management of all things oil and gas.

Next I would like to take the time to talk about one of the factors that I believe is responsible for pushing oil prices to where they are today. Investing – or the lack thereof. The European Bank for Reconstruction and Development is an internal financial institution that works to build market economies. Just recently, they announced that they will not continue to invest in upstream oil and gas projects. Why is this significant? It is part of a growing movement where more and more banks announce their decision to stop their support for exploration and production projects. As the bank’s vice president put it, “The low carbon transition requires the world economy to move in less than 30 years from a more than 80 per cent reliance on fossil fuels to a net-zero model. This is a challenge that is unprecedented in economic history. Similarly, the associated opportunity is enormous.” While I don’t disagree with this statement, the shifting of investment is only going to increase the scarcity of oil. The best reserves have already been produced, so if the cost to produce harder to reach oil increases while investment for it simultaneously decreases, the price for oil is going to become that much higher as the energy return on investment decreases due to the lack of exploration. I see this as an immediate issue as this impacts the way we consume energy today, and not in 2050. We currently don’t have the resources to fully shift, that is why they call it a transition rather than a change, but this lack of investment will definitely put pressure on oil in the short term. Now, this isn’t to say that everyone is divesting, just a growing number of people everyday who are either controlled by their investors or want to signal that they are worried about the energy needs of the future. I’m sure someone is still funding lots of these projects, but the irony is that they are probably doing more to provide cheap affordable energy than the banks who have stopped pushing money towards exploration and production. Another hypothesis I have is that the continued investment in midstream and downstream will disproportionately support a network for the delivery, transformation, and use of hydrocarbons rather than the production which will only further cement the use of hydrocarbons. Upstream is not getting the love it needs, but the world requires what it delivers. Buckle up folks. Energy is about to get incredibly expensive, but fortunately for us involved in industry, oil will get more expensive as well.

But that is all we have for this episode! If you are hungry for more content concerning the future of energy, we just released a video on the concept of peak oil usage that has been very well received so far. You can find that video by searching for RARE PETRO on YouTube, and you will also encounter the rest of our vast library of content to keep you busy. If you have any suggestions for a show or topic that you would like to see, please reach out to us at podcast@rarepetro.com, and you will also get entered into a giveaway for some RARE PETRO gear. 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: investment | Mexico | upstream

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