In this episode of Monday Madness your host Tavis talks about high WTI prices, new super-deep discoveries in China, and ERCOT precarious situation.
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing a fresh new episode of Monday Madness straight to your ears on June 28th, 2021. This of course is the last episode of Monday Madness for the month of June, and next week’s episode will be a day late as we will be observing the 4th of July. I personally will be flying my little sister in for her 21st birthday (party blower noise), but I hope you have some fun plans as well. Get out in the sun with some people you like, and really enjoy the time off! But I know you didn’t come here to listen to me tease you about upcoming holidays and vacation, you came here to hear about all the hottest news and statistics in oil and gas. Let’s get into it!
First, of course, WTI pricing. If you haven’t checked in a couple of weeks 1) you likely live under a rock 2) you need to check ASAP! The price broke $70 on the 8th of June, and shows no signs of stopping. This past week it spent a lot of time in the $73 territory while briefly poking through $74 early Wednesday before falling back into line. However, Friday pushed the price back to $74 where it pretty much remained through the weekend before an early morning fall back down to $73 by about 8:00 AM mountain time. So, a couple of things going on here. First, the price has spent a full month moving up. That is not to say there were no dips here and there, but the trendline is very clearly positive. On May 31st, the price was $66.32. That is about a $1.50 increase every week for the past 4 weeks. Some will say that this price movement is completely unsustainable, which brings me to my second point. We spent the past year seeing lots of resistance at certain benchmarks. $40, $50, $60, $65, $70. All of these exhibited a decent amount of resistance, some for weeks at a time. In this past week we went from a brief peak at $74, and immediate resistance, to see sustained $74 pricing on Friday afternoon and Sunday evening. That is an incredibly short time frame to see such a violent pushdown and eventual stasis. One thing to consider is that Friday and Sunday are usually outliers, but even so I am excited for this week. As I record this, the price is back down to about $73 flat, but I would not at all be surprised if we hit $74 quickly and began testing resistance at $75. Then again, headlines seem to be gripped by this new delta plus variant of COVID, so we will see if any serious travel bans occur or if trading slumps again adding downward pressure to the price.
Next, the rig count. We are fast approaching 50% completion of the year 2021, and the rig count has been nothing but good this year… well outside of 2 or three weeks we lost a rig. Other than that, we’ve seen nothing but massive gains! This report reveals… no change from last week! That’s right. Last week we had 470 rigs, and this week we have 470 rigs. Even so, we remain up 250 rigs on the year which is a major improvement. Not a whole lot of significant change on a basin by basin level with a rig gained here and lost there, but state level analysis shows that California lost 1 rig bringing their total from 7 to 6 and Alaska gained one rig bringing their total from 3 to 4. I wish I had more to say, but this apparently was a rather dull week for the rig count. A majority of the wells being drilled are oil wells and horizontal. Even though they may be the majority, horizontal rig activity fell 4 to 421 while vertical fell 1 to 19 and directional increased by 5 to 30. While they still occupy a minority, that is a 20% increase in directional drilling which is rather significant. Other than that, a really dry report, but hey! No change is better than negative change.
Last statistic to touch on is inventories. If you haven’t already followed RARE PETRO on LinkedIn, you definitely missed Thirsty Thursday, our weekly inventory report but that is okay! You can still catch this week’s by following us on LinkedIn, or simply checking our website on Thursday afternoon. As for the numbers, The API predicted a hefty 3.6 million barrel drawdown, but we actually saw about double that at 7.2 million barrels. The EIA came in expecting a slightly larger drawdown at 3.9 million barrels, but they too smashed their estimate at an actual 7.6 million barrel drawdown. This leaves the streak alive at 8 straight weeks of drawdowns, despite some of the drawdowns being miniscule. Still, if this trend continues it might raise concerns about supply demand fundamentals. OPEC+ will be meeting in early July to renegotiate production cuts, and it is likely that they will add another 500,000 barrels of production per day. On the refined side of things we see that after weeks and weeks of gasoline builds we finally observe a draw, and a significant one at that. The EIA’s latest report revealed a 3 million barrel drawdown bringing the total from 243 MM to 240 MM. While this is nice to observe, this is movement that is appropriate for right about now and leaves it slightly below the median of the 5 year range, but within it nonetheless. Propane inventories continue to climb, but not as aggressively as we had initially anticipated given the boundaries. It is now right up against the bottom of the 5 year range, but has been self correcting in the past. It is not unlikely that they will be back to the middle of the range in a week or two. Distillate inventories remain average (read boring) so nothing to write home about there. A slight build, yet easily within the wide 5 year range on inventories.
But that concludes the statistics. Considering where we came from, I’d say that was a very successful first half for 2021, and I think the second half might get just a little bit wild.
To kick off our news stories, we head over to one of the United States’ greatest customers and competitors: China. The China National Petroleum Corporation has unveiled a new discovery with up to 900 million tonnes of reserves. Again, that is almost a billion tonnes of oil that China feels is recoverable and economic. What makes that claim even more incredible is the fact that they had to use ultra-deep drilling techniques to punch through 8,470 metres of geology, or just shy of 28,000 feet for my fellow imperial users out there. While it may sound impossible at first, it should be noted that ultra-deep drilling techniques have been experimented with for quite some time now. Russia and Exxon completed a well in 2017 off the coast of Russia that extended 49,000 feet into the ground, so it is not impossible that China has drilled to 28k. The well was a result of 6 years of exploration in the Tarim basin, or the largest oil and gas deposit in China which is home to an estimated 16 billion tonnes of oil. So far, the Chinese have produced about 2 million tonnes this year which is already up from the 1.52 tonnes in 2020. China produced 3.87 million barrels of oil per day last year which was actually more than they produced in 2019. Still, their incredible demand for oil leaves them as large importers. So what is the significance of this story? Well, China has the tech to access billions and billions of barrels of oil at unreasonable depths, has a high demand for oil, and is not exactly fond of the US when it comes to international affairs. We’ve talked about this in the past, but China may be attempting to position itself as one of the big boys in oil and gas to encroach on a market that the United States feels it has a decent grasp on. Why deal with the sanctions and red tape of the United States when you could just start your own yuan-based petroleum contract with Russia and friends in the area? Again, there is no current evidence of this going on, and it would be a slow process, but China is definitely flexing their muscles with this discovery and production. In the age of an energy transition, I am incredibly excited to see how our country navigates through its relationship with others who may have different climate goals.
Our final story will take place down in Texas. For the second time this year, the electricity supply is threatened by the weather. In February we saw the grid fail due to people’s demand for energy in unusually cold temperatures. Now, summer progresses and things are heating up leading to another high demand for electricity, or record peak demand to be more exact. The Electric Reliability Council of Texas, or ERCOT, has been asking residents to limit energy usage from 3:00-7:00 in the evening, or during peak demand hours. They were able to limit the demand to 69,957 MW which is a new June record. The all-time high was recorded back in August of 2019 when it topped out at 74,820 MW. This August however, expects a peak of about 77,144 MW, and ERCOT expects to deliver. Much like everyone else down there, I am increasingly skeptical about whether or not they can deliver that amount of power. If they do, it will likely be a success thanks to fossil fuels supplementing peak loads throughout the state, but the poor grid may leave more and more people vulnerable. Remember the rolling blackouts in California last year? Could happen again if Texas’s grid is not up to snuff. I see major distribution changes in the future, I just hope it is not a result of a catastrophic failure to deliver power. How do you feel about Texas’s grid? Is their independence something that should be emulated? Are they shooting themselves in the foot? Is it the future of energy distribution? Please email me at podcast@rarepetro.com to share your thoughts. We would love to feature them in a future episode, and you just may be entered into a little giveaway for some RARE PETRO swag! Sounds like a win-win situation, no? Again, that’s podcast@rarepetro.com.
But that is all we’ve got for this episode! Please rate and subscribe to the podcast so that we may continue to deliver the hottest oil & gas news, statistics, and research. We do this for you so don’t be afraid to reach out on LinkedIn or anywhere else to say hello and provide feedback. This has been Tavis Kilian with RARE PETRO, and until we see you next time, happy fourth of July, and take care everybody!