A tragic fire, utilizing archaic energy resources, and even less global supply.
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Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on this bright and sunny morning of the 20th of June, 2022. Have you ever seen the movie “There Will be Blood?” I somehow had never gotten around to it and put it on last night. Lemme tell ya, from what I’ve seen so far, it is GREAT! I did fall asleep only 1 hour into the movie because I am trapped inside the body of an old man who struggles to make it past 10 PM, but I will certainly be finishing it tonight. But you didn’t come here to talk about all the wonderful pieces of entertaining content in the world of oil and gas, you came to take a walk on the nerdy side as we sift through data and some of the biggest new stories in energy. Let’s get to it!
We’ve got a lot to talk about when it comes to commodity prices. I’ll just cut to the chase, WTI is down to about $110 and natural gas has been pushed down to $6.72. This is the cheapest natural gas has been since April. The biggest reason for this was the accident that Freeport LNG experienced at an LNG export facility. This Houston-based facility is the 7th largest in the world accounting for 20% of the LNG processing capacity in the United States. The initial assessment believed that the facility would be down for 3 weeks. This dropped US natty gas prices to the $7 range. Sure, not as good as they were before, but the price very quickly dusted itself off, and started to climb. By the time it neared $8, a statement was released claiming that natural gas capacity would likely be reduced through September. Still, all things are in balance. As the US lost its capacity to process natural gas, our now less accessible gas was worth less. European gas prices are spiking once again, despite being at all-time highs. This hampered ability to deliver gas will likely give commodity prices a little bit of time to cool off, and could quite possibly lull the current administration into a false sense of energy security, though there are some other factors that could push the price higher (more on that later).
Next is the rig count. Last week we saw New Mexico overshadow Texas, and that trend will continue. The most recent rig count shows we are up 7 rigs and sitting at a total of 740. This is 270 more rigs than we had this time last year. Basin-by-basin the Cana Woodford saw 2 more rigs while Ardmore Woodford, Eagle Ford, and Haynesville each saw 1 more. The only basin to lose a rig was the Granite Wash. Surprisingly this means there was absolutely zero change on a state-by-state basis outside of New Mexico which tacked 7 new rigs. I’m not quite sure how it ended up shaking out like that, but it has. The new rigs are split almost evenly between gas and oil reservoirs with the overwhelming majority being horizontal wells. Even the Gulf of Mexico got in on the action with one more rig added to its total bringing it to 16. Not a bad rig count. Not a bad rig count at all.
Lastly is the inventory data which we visit every week on our Thirsty Thursday reports. Here is what you missed in case you didn’t get to read it. After incorrectly predicting a draw, the EIA came back with some optimistic expectations. Unfortunately, the prediction of a draw was overshadowed by a build of 2 million barrels. The API didn’t fare any better. Their predicted draw was smaller, but so was their reported build of 3/4 million barrels. While this build is smaller than last week’s, it doesn’t establish a clear pattern (unless that pattern is a build of 2 million barrels every week). Fortunately, the balance of builds and draws has kept our domestic inventories traveling sideways at around 420 million barrels. If it holds out for a few more weeks we will be close to re-entering the historical 5-year range for the first time since January of this year. Gasoline inventories continue to fall lower and lower with another reported drawdown of 700,000 barrels. The newest participant in the blame game is now oil refineries after the president discovered that American capacity had been reduced through the pandemic. Refineries have struggled to deal with huge spikes in available refining capacity that is ultimately trending downward. This doesn’t even begin to consider that these companies were losing money throughout the pandemic. Still, Biden wrote a letter to companies accusing them of taking advantage of higher than usual profit margins. He threatened to take action if they refused to do something themselves, but the threats are still vague and leave a lot to the imagination. While gasoline prices are not increasing as quickly as they were in recent weeks, we have now hit a national average of $5 per gallon of regular-grade fuel. This likely won’t change until we do get some refineries back online, but government intervention could ultimately slow that process. Propane inventories are slowing their roll as they come closer to the bottom of the 5-year boundary. It has been self-corrective in the past, so it will likely be fine through the summer, though winter could pose a challenge. Distillate inventories continue to see modest gains, but are still far lower than the historical 5-year average. Now is the time to stash a lot of these commodities into barrels and underground reservoirs. If we fail to secure resources now, winter could be especially expensive.
But folks I believe that is all I have for you as far as our weekly statistics go. We oughta start looking at some of the latest stories. If you haven’t heard, Russia has once again reduced gas supplies to Europe, and all of the once well-supplied customers are starting to get worried. A new solution has recently been proposed, and it is mind-boggling. Germany, Italy, Austria, and the Netherlands have started to mention that the solution to the shortage could lie in – get this – coal. Yupp. We are sitting on millions of barrels of oil here in the United States that the world needs for power while we watch Germany dig up dirty lignite to keep the lights on. Are we regressing back to the stone age? Is the next bright idea to start burning more wood for power because it is more easily classified as a renewable resource? German Economy Minister Robert Habeck says, “That is painful, but it is a sheer necessity in this situation to reduce gas consumption. But if we don’t do it, then we run the risk that the storage facilities will not be full enough at the end of the year towards the winter season. And then we are blackmailable on a political level.” That last sentence right there was something we had been touting for months. Even pre-invasion the RARE PETRO media team was worried that the Nord Stream 2 would afford Russia too much geopolitical leverage. Unfortunately, they moved on with all these plans, and here we are as a result. I think Germany has plenty of coal to sell and will likely be very happy to do so, but it is a bit frustrating to watch the world refuse to acknowledge that we still need oil and gas yet refuse to produce it. So now we have European countries lifting the cap on how much coal can be fired, and that is the craziest most recent development. Let’s move on.
We also have a story talking about something that appears to be more and more common: Losing production capacity. We’ve talked quite a bit about Libya’s struggles, Iran, Venezuela, and the myriad of reasons why these folks are struggling to bring more oil to the global market. Now we’ve got an update on Ecuador. I know it is not at the top of the list in terms of large producers you think of, but they do have a good 8 billion barrels of proven reserves. Right now they do produce about 400,000 bbls per day, but they are excited to double that in the next few years. Unfortunately, protesters have started to enter the country’s oilfields, and now force majeure has been declared meaning exports will be halted. While this seems like an extreme response, you must keep in mind the President said, “I called for dialogue and the answer was more violence, there is no intention to find solutions.” Regardless of who is instigating the violence, it seems global supply has yet again taken another hit. Violent environmental protests against oil may become more and more common. It is a direct result of the United States refusing to produce oil in its own backyard. We would rather be blind to where it comes from and consume it without guilt. Unfortunately, that means companies begin operating in the Amazon rainforest with environmental regulations that are effectively nonexistent. We are capable of producing abundant and cheap energy, but our refusal means that the environmental impact is amplified somewhere else. No wonder protesters become upset when you carelessly operate in some of the most biologically diverse and sensitive areas in the world. I believe we will see more protests this decade as the energy crisis develops and we experience bumps in the transition. Stories like the increased consumption of coal that we just looked at somehow illicit a response of “oh we need more renewables” rather than “oh we need energy security so we don’t have to become subservient to the ones that produce it.” It is some frightening stuff, but the sooner we acknowledge this reality, the sooner we can start to bring these energy prices down.
Now I don’t want this to get too soapboxy. We do pride ourselves in presenting factual information in terms of world events in Monday Madness. If you do want to get a little more loosey-goosey with the formalities, then I encourage you to listen to the “Wacky World of Energy.” Anthony and I pull none of the punches when discussing these stories and often get into a lot of fun speculation. We try to provide a healthy of information and entertainment, but this Monday Madness segment is reserved for the information portion. We will have a new episode of that coming out later this week along with plenty of other content, so go ahead and frac that follow button and give us a peek on LinkedIn. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care everybody!