Happy Memorial Day! Join your host Tavis as he touches on all the most important statistics, a week of activism, and the future of OPEC!
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another fantastic episode of Monday Madness on Tuesday June 1st, 2021. It is finally June, and it also finally feels like it is summer… on the days that it isn’t rainy, that is. We just came off of that long 3 day weekend so I hope everyone had a fun relaxing time. But this episode of Monday Madness is being released on Tuesday meaning we are already behind, so let’s waste no more time and get to it!
First, WTI prices. Seems like people got antsy waiting to get through the holiday and dump their money into futures as oil prices hit $68.68 early around 8 AM this morning. The prices has fallen, but it seems as if it will be stabilizing around $67, but you will just have to wait and see what it does for the rest of the week. With all of the big headlines surrounding mergers, court rulings, and activist investors, many media companies have been pushing the narrative that oil is dead and the future is renewables. I’m sure we all know how RARE PETRO feels about that bearish sentiment, but consider the fact that the $66 to near $69 price range is higher than anything we have seen since about Q4 of 2018. In those times, prices peaked at around $75 per barrel, so I am excited to see if we can not only get through $75, but make it a new price floor as it continues to blow past. If that happens… who knows? Just speculation, but it holds potential to boost prices back to what they were back in 2014. But again, lots of speculation and me being an optimist over anything else, but still something you will want to watch out for.
Prices fared well, but what about the rig count? I’m pleased to report after last Friday, we’ve got another rig count that is positive! 2021 has not disappointed with drilling activity so far as we saw 2 more rigs last week meaning we are up 106 rigs since the start of this year alone, and up 156 rigs year to date. It looks like we are seeing most of that activity in Texas as the Permian puts up 2 rigs, and the Eagle Ford bumps up their total by one. All other major basins saw no change, excluding the DJ-Niobrara area which lost one and the Marcellus which lost two. Overall, Texas is up one, and Oklahoma is up two. As for type, horizontal saw an increase of 3 to 415, vertical remains at 15, and directional loses one dropping it to 27. Of the wells being drilled, nearly 80% will be oil wells with the other 20% falling into natural gas. Overall, we saw the Permian grow (typical) and not a whole lot else change. Another week of positive numbers, so I will not be complaining at all.
So far we’ve seen great pricing and a good rig count. Can we go 3/3 on good news related to our statistics? The API and EIA say, “You sure can!” The most recent inventory reports show that the API overestimated their drawdown as they saw a 439 thousand barrel inventory decrease, and the EIA underestimated their prediction after reporting a 1.66 million barrel drawdown! A great week for statistics it seems. Both agencies predicted about a million barrels in drawdown, and I would say if you averaged out their numbers, it would be about right. Fortunately, it seems that we are slowly chipping away at the huge inventory builds from March, but bringing down the total nonetheless. Still, last week we saw a build of about this magnitude, so everything balances out in the end. In terms of our refined products, gasoline continues to play with our emotions as it takes another small dip bringing itself right up against the lower boundary of its 5 year range. This could be a result of the gasoline panic buying from the past couple of weeks, but who can tell? All I’m saying is that the video I saw yesterday of a man filling a tarp lining his truck bed with gasoline does not bode well for the rest of us for more reasons than I can count. Distillates also took a bit of an inventory dip, but that is something to be expected around this time of year, and it is at totals that are consistent with the past. Propane went roughly sideways bringing it close to its lower boundary of the past 5 years trading history. Overall, nothing out of the ordinary, but gasoline has the potential to become even more expensive in the near future.
I think that brings us to the end of our statistics, and it really wasn’t that bad! Hell, I’d even argue that it was good. Sure, the numbers are modest, but they moved in the direction we wanted to see, so I’m looking forward to a great week ahead.
As for the news, I’m sure many of you are already aware, but several companies had to seriously reevaluate their activities and goals for the upcoming years. Not too far back, Royal Dutch Shell pledged to cut its carbon emissions to net zero by 2050. Last week, a court in the Netherlands issued a landmark ruling claiming that their efforts were not good enough. The courts want to see a 45% reduction from 2019 levels by 2030, or more simply, they told Shell to do it faster. Chevron’s shareholder meeting revealed that 61% of voting shareholders want to reduce scope 3 emissions even more. In case you don’t know, scope 1 emissions are direct emissions from owned and controlled assets, scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating, or cooling (kind of like OPEX emissions costs), and scope 3 includes all other emissions occurring in the company’s value chain. This means that refining Chevron’s crude into polyester and eventually a T-shirt before transporting it by truck to a retail outlet adds to Chevron’s emissions portfolio as they are the head of that asset’s value chain. It’s no surprise that in 2019 scope 3 emissions composed 91% of the company’s emissions from total products sold. So how can Chevron reduce their emissions and please their shareholders? There are really only 2 options: 1) reduction in production or 2) divestment. Otherwise most any use of oil and gas, except as a chemical feedstock, will add to their total scope 3 emissions. Even though Shell and Chevron got it bad, they weren’t the star of last week’s ESG revolution. That title goes to ExxonMobil. Many months ago, or Monday December 7th to be exact, I covered a story in Monday Madness in which there was a proxy fight between the company and new born activist investment firm, Engine No. 1. If you want the details of the conception of Engine No. 1 and their demands, check out the December 7th, 2020 episode of Monday Madness. Fast forward from then to the present, and the efforts of Engine No. 1 has placed another 2 candidates on the company’s board of directors in an effort to restructure the bleeding company and face them towards a future of low emissions and profits. These stories all happened last week, and you can find many other better written accounts and even stories celebrating this turning point that will usher in the end of Big Oil. Now I’m not here to talk about that, nor do I believe in it. I want to highlight one simple fact. Our energy needs will continue to grow, but the results of these rulings and restructurings will remove valuable energy producing assets from the markets. Demand going up with simultaneous supply decrease results in a more expensive pricing point. Energy is likely going to get more expensive. You may be thinking, “I’m okay with that! I get to vote with my dollar, and I can certainly handle an energy bill increase!” That is good for you, but not everyone can, especially those in countries that don’t produce oil and gas and are run off of imported natural gas, diesel, and gasoline. Absolving the masses from energy poverty has resulted in decreased famine, decreased environmentally related deaths, and longer lifespans. All I’d like to highlight with this little speech is that energy costs and energy accessibility are indirectly related, and many people may be hurt because of that fact. Food for thought, but I am curious to hear what you have to say about that topic. Please send your thoughts and opinions to “firstname.lastname@example.org,” and I would love to feature your responses next week.
Lastly I’d like to take a minute to visit an organization we have not talked about in far too long: OPEC. This news is still hot off the press, so hopefully you have yet to read about it. OPEC has been doing a pretty good job at maintaining production output. This is one of the reasons prices have been able to rebound nicely, because OPEC is choosing how much oil to keep from the market. Still, the collaborative OPEC+ decided to boost output in July which was the plan since April as they expected to ease 2.1 million barrels per day of production capacity back online. This isn’t anything super concerning. Like I mentioned, this has been the plan for a couple of months now, but I think the outcome everyone was worried about was OPEC+ deciding that prices are doing well enough, and we can actually return to planned production a month early. Oil is up 30% on the year and sitting at 2 year highs after all. Many commodities research groups at this point have highlighted a much more concerning aspect: just how much oil is Iran bringing to markets despite trade restrictions and sanctions? Iran is now in discussions with six world powers to enter back into the old 2015 nuclear deal. Iran simply demands that they are allowed to trade freely if they rejoin the deal. Given that a large deal of the nation’s economy is a result of oil and gas activity, it is likely that this deal could come to fruition and add even more oil to the global trading arena. Jeffrey Currie, a researcher at Goldman Sachs says, “It’s too early to give specific numbers around Iran, so I think the best you can hope for in terms of how they are going to deal with Iran is the indication that they are willing to offset any increases in Iran. That could be the positive upside surprise coming out of this meeting.” Even though OPEC+ reserves the right to not offset a flood of Iranian production, OPEC Secretary Mohammad Barkindo said yesterday that he did not believe higher Iranian supply would be a cause for concern. At the end of the day, there is no way around the fact that oil and gas is necessary, and everyone is chomping at the bit to get back to normal production levels. Sure, it could pose a shock for some pricing benchmarks, but with the decreasing production resulting from companies looking to target their scope 3 emissions, it just might be offset. That raises another question… If all of the American and European Supermajors decide to curb production, someone else surely benefits, no? Unfortunately, we can’t answer that question today as we are out of time! Be sure to subscribe and follow as that question could be answered as soon as later this week! RARE PETRO is always generating insightful and provoking content because we are huge fans of learning new things and looking at the bigger picture. Be sure to head to www.rarepetro.com to see our useful links page where we collect a lot of our data and news, the services we offer as a company, and more than 18 months of content covering more than you could imagine. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!