In this episode Tavis covers the improving price of natural gas, mystery oil from Malaysia, and Europe’s success in pivoting from Russian gas.
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Audio Transcript
Alrighty everyone, welcome back! The whole RARE PETRO gang has regrouped in Colorado which means I should be able to deliver some content more regularly in the coming weeks. We are long overdue for a Basin Breakdown and I think it has been a couple of months since our last Wacky World of Energy. Other than that, welcome to the other side of the summer solstice! June 21 is the longest day of each year… for those of us who aren’t Australian at least. If you are in the Denver area like myself, the solstice hit at exactly 8:57 AM on the 21st and the day is 5 hours and 38 minutes longer than the shortest day of the year: the winter solstice. But I know you didn’t come here to talk about astronomy, so we will cut it before I stray into astrology and get right to the meat and potatoes of the podcast.
First is the WTI price. We already covered most of last week’s price action on the Friday morning episode, so we only have the end of that day to review before closing and reopening this morning. Friday the price fell from high $69 to high $67. Fortunately it almost immediately rebounded to the low 69 dollar range right before close so that whole day can be roughly chalked up to no change. When markets opened again on Sunday evening there was no major change from the weekend which carries all the way through to present. It may sound totally normal, but the action for Monday looks just a little strange. Huge $1 swings from $70 to $69 and back in 2-4 hour cycles. I can’t tell you where it will finish by the end of the day, but this volatility doesn’t bode well for the rest of the week. There is no need to fret because even Brent has the same thing going on with a near $5 spread. Like I said, lots of volatility right now, but if you don’t see that spread normalize by the time prices stabilize, there might be cause for further analysis. Natural gas continues on its month-long run up and actually found a lot of strength at the end of Friday as it rose 20 cents from $2.60 to $2.80. We saw this price last back in February with a little temporary peak in pricing, but we are very close to approaching prices that we haven’t seen since that massive decline from December to February last month. A large chart looking at the past 6 months makes this increase look like the peak of a cycle so we may not have anywhere to look but down from here. Hopefully next week we see something more interesting.
Next up is the rig count. We already covered this on Friday, so I’ll just hit you with a quick recap. Last week the slaughter slowed down as we dropped only one rig bringing a temporary reprieve from the abysmal rig decrease. I mentioned that the hemorrhaging had stopped, but we weren’t out of the woods yet. The downward trend is easily visible, and the ride continues this week. Down another 8 rigs bringing the US total to 687 or 53 fewer rigs than we had this time last year. This also means that in 2 months we have lost 68 rigs. So who were the biggest losers? At a basin level it was the Permian and Marcellus who were down 4 each. The Eagle Ford is up 2, and (surprisingly enough) the Utica is up 3 rigs for the week. State by state we have a whole slew of change. On the negative side is New Mexico down 4, Louisiana down 3, while Oklahoma, Pennsylvania, and West Virginia are all down 2. The only 2 states to see something good are Alaska (up 2) and Ohio (up 3). It is clear that emphasis is falling away from unconventionals as we lost 10 rigs making horizontal hole yet gained a rig each making directional and vertical. I think this is the beginning of a large response to suppressed commodity prices. People are recognizing that we are stuck in this band and nothing can really force the price any lower or higher. Would you work hard to produce more when your breakeven price has climbed? Probably not. Until things become a little more attractive in the pricing arena, we will likely see the rig count to fall pretty low. I’ve got no idea where it levels out, but I have a bad feeling we are still several weeks or maybe even months out from that.
Next up is Nick Fernhout’s world famous Thirsty Thursday which can always be found on www.rarepetro.com along with a great cocktail recipe. Here is what he had to report this week. Let’s first take a look at the EIA’s data, a forecasted build of 1.9 million barrels and a reported draw of nearly 4 million barrels. If you work at the EIA and are reading this, why are the forecasts so off lately? The people, me, want to know. Whether it be out of luck or reliance on a different set of data the API forecasted a seemingly more accurate draw of 0.5 million barrels against the reported actual draw of 1.25 million barrels of crude. There is nothing too exciting to note about either figure this week. Crude stocks are smack in the middle of their 5-year range and draws/builds are ebbing and flowing as normal. For two months or so now the price of gasoline has been very steady despite gasoline stocks rising and falling tens of millions of barrels over the same period. Perhaps a sign of gasoline prices’ stability? Or maybe something else at play. As I said earlier, gas prices are steady. This week the national average dropped just $0.005. In other news, we have a new leader for the most expensive gas in the country. As long as I have written this weekly report I have never seen Washington State top the charts, but here we are. At $4.948 per gallon, Washington is not the place you want to fill up your gas-guzzling car. Diesel costs the same as it did last week, however, distillate stocks are rounding the curve and are into the flats this week.
That rounds out our statistics for the most part, but I would like to consider just one bonus statistic this week. Anthony McDaniels sent the team a figure showing some data derived from Bloomberg calculations on Chinese import data according to a few sources from the IEA. The graph shows how China started to import way more oil from Malaysia after 2020. In fact, they have hit an all time high of 1.4 million barrels of oil per day. You might be thinking, “Huh that’s neat. Good for Malaysia!” Well here’s the funny part: if you do a little googling searching for how much oil Malaysia produces – not exports to china but produces – you would find that it is somewhere in the neighborhood of 600-700 thousand barrels per day. That is data from Petronas (the Malaysian National Oil Company) and the EIA. So how exactly is Malaysia exporting 2 times or more oil than it produces on a daily basis to a single country? I’ll give you just a few moments to try to guess because we’ve talked about it on this show before. *5 second pause* The leading theory right now is that the oil is coming from Iran. RARE PETRO has talked about this before in past episodes of many different segments. The world demands oil. Oil demand is back to pre-pandemic levels. Even though the US or the EU may declare sanctions, there is still tons of oil being produced. All it takes is turning off a few transponders, trading some oil out in the middle of the ocean, faking some documents, and BOOM… it is no longer Iranian oil. The same goes for Russia. This is why it is essentially pointless to throw an 11th round of sanctions at a country. If there is a hydrocarbon, there is a way.
Next, we are about halfway into this year and we’ve got a good amount of data to sift through. One of the most significant things to note is that Europe’s LNG imports surpassed their pipeline gas imports for the first time ever. Not a totally mind blowing statistic at face value considering that they had to pivot hard away from the Nord Stream, but it did happen rather quickly. Surprisingly, global natural gas production was pretty stable last year compared to 2021 levels meaning not a lot of extra supply had to come to markets, but keep in mind we may not have data from every participant. In 2022 gas imports were down 35% to 5.3 trillion cubic feet while LNG imports rose to more than 6 billion cubic feet. The fact that Europe as an importer was able to construct the appropriate amount of infrastructure to receive that gas is mind boggling, and I’m sure they haven’t really stopped. I hope it is enough because Russia supplied almost 50% of Europe’s gas pre-war, so a full cutoff could be devastating. Of course we still have Russia’s ban of energy sales for anyone who enforces a price cap that they recently announced they will extend through 2023, but that should have more of an effect on oil anyway. Props to Europe for figuring out how to prevent themselves from getting taken advantage of… at least for now.
But folks, that is all of the time we have today. I know the release schedule was weird with another episode coming out just last Friday, but we should be back into the swing of things moving forward. If you liked the podcast, consider subscribing! We put out new content regularly, and we also have a website where we post plenty of our other content and some of our favorite news sources that we are reading through in our free time. You can find all of that at www.rarepetro.com. We love reviewing all of these things in our free time, and that is why we make content. The information is free, so you may as well take advantage of it. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care, everybody!