We see some strength in commodity prices, but only because Saudi Arabia is turning into a cornered cat. What’s going on?
CLICK YOUR PREFERRED STREAMING PLATFORM TO LISTEN TO THE PODCAST
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian bringing you a new episode of Monday Madness on June 5, 2023. That’s right, we are already getting pretty deep into June which means in not too much more time we will be finished with the first half of 2023. A slow year if you look at commodity prices alone, but there has definitely been a lot going on behind the scenes, and it seems that things are starting to get restless. We’ve got a lot of great news to get into today from all around the world, but you know we gotta get started with statistics first. Sit back, relax, maybe even grab a drink, and let’s get into some Monday Madness.
Commodity prices are in a bit of a frenzy right now. If you checked the price last week, you would know that it opened around $73 and fell to as low as $67.25. It was not a fun time to be watching the charts. Then, some grumblings started to occur internationally and the price jumped back to $70 and continued to build until trading closed for the weekend. When markets returned the price opened just shy of $74 and now we have seemingly stabilized at $72.54 at the time of recording this podcast. Now I know I teased a little bit of news which we will definitely get into, but we have to be careful saying what was responsible for price movement. Sometimes it is pure volatility. Sometimes we don’t know at all. This is one of the larger price swings upward in recent weeks, but it came off the back of a less than ideal inventory report. WTI is doing well for the moment, but there is no telling why or for how long that will remain true. As you can imagine, Brent was dragged upwards as well and outpaces WTI by about 4 and a half dollars which is slightly larger of a spread we’ve seen recently, but again we’ve got a lot of aggressive and volatile movement, so just wait for that to settle out a bit. This has all been pretty good news for oil, and surprisingly enough, it extends to gas! Well, sort of. This time last week the price was about $2.34 and from there it only went down. Around the same time WTI made its jump, natural gas started trending upward too, but not any higher than it was a week ago. At the time of writing this script the price is at about $2.30, and I don’t have a lot of confidence that it will maintain a flat trajectory. Overall, decent news for WTI, and we will delve into the means later.
Next up, the terminally falling rig count. Another double digit downfall as we lose 15 rigs last week bringing the total to 696 or 31 fewer rigs than we had this time last year. Last time we had less than 700 rigs was April of 2022 while we were on the way up. Lots of basins fought to lose the most rigs but the Eagle Ford, Haynesvilla, Permian, and Williston each lost 2 rigs. Right behind was the Ardmore Woodford and Cana Woodford that each lost one. This brings Texas’s state total down 6, Oklahoma’s down 3, and Louisiana’s down 2. Pulling up the rear is New Mexico, North Dakota, and Wyoming with one rig less each. The Gulf of Mexico somehow didn’t lose one, so it remains at a total of 20. Strangely, almost all of the rigs that were laid down were drilling horizontally and targeting oil. The rig count certainly looks strange, and if you really want to see something weird go ahead and plot the EIA’s DUC count for the last 3 years using each month of data as a set. That’s all I’ll say about that one.
Our last statistic to visit before the news is of course Thirsty Thursday brought to you by Nick Fernhout. As always, head on over to www.rarepetro.com to read it yourself. If you are short on time, I’ll do my best to relay all the important information. This week’s 4.5 million barrel build comes on the back of last week’s 12.5 million barrel draw. The forecast was for another draw, but obviously, we aren’t seeing that. The API reported a slightly larger build of 5.2 million barrels while also forecasting a draw. There’s nothing to exciting to report on concerning the ups and downs as of late besides last week’s huge draw; it’s just the regularly scheduled ebb and flow of the crude oil inventories. Gasoline stocks remain relatively flat after dropping for a few weeks which spells well for the price of gas which has been creeping higher and higher over the past several weeks. While gas is technically cheaper this week compared to last week, it might be hard to tell considering it’s a difference of less than 1 cent. If you want to save some money on gas this week I think you already know where to go, Mississippi. Diesel cheapened too this week by $0.02 on average nationwide. Distillate stocks made a slight comeback this week! Meanwhile propane and propylene are overachieving.
Thanks again Nick for that great analysis. Now for the news I had been alluding to. Saudi Arabia has agreed to some new production cuts for a month – 1 million bpd to be exact. That may not seem too out of the ordinary until you throw in some speculation they voiced. Now let me first say that I did my best to trace this information back to something official and public, but I was not able to so please keep that in mind, but this was a tidbit that was sent my way. “BREAKING OPEC STATEMENT CANADIAN COMPANIES $CNQ AND $SU HAVE BEEN IDENTIFIED AS MAJOR NAKED OIL SHORTERS. BY EXECUTING DAILY LADDER ATTACKS, THE COMPANIES OPENLY SELL MILLIONS OF SYNTHETIC OIL BARRELS PER YEAR SUPPRESSING BENCHMARK OIL PRICES. OPEC INTENDS TO NOTIFY REGULATORY AUTHORITIES AND CALLS ON ALL OIL COMPANIES AND INVESTORS TO ALERT THEIR CONGRESSMEN TO THIS DESTRUCTIVE CANADIAN CONSPIRACY.” Okay, so what the hell does that mean? Let’s define a few things first. A “naked shorter” is just a simple way to say that someone is shorting a share that they either don’t own or can’t confirm is available. Now in the case of oil it has always been pretty unlikely that a boil of oil traded was not available, but that could be changing in the present. Saudi Arabia is essentially claiming that these companies are placing bets on oil that may not even exist yet and in turn driving down the price. This brings us to a “ladder attack.” Bidders on the market (typically hedge funds with vast amounts of capital) are just putting in lower and lower bid prices between themselves. The trick is that there may be little to no volume on the trades in comparison to the huge volume of shorts being made, meaning that the stock looks like it is falling in value despite nothing really changing in the short term. Here’s a little metaphor to help clarify. Let’s say you and your pals are hanging out and see that your neighbor is selling a relatively new F-350 with all of the package options. He’s asking $25,000. While you negotiate with your neighbor one of your friends walks up and says, “How about I just sell you mine for $18k? Same package, color, and miles.” You agree and leave the neighbor’s driveway, but don’t actually buy your buddy’s truck. Instead you wait until he’s grilling on his porch the next day while you and your buddies are hanging out on yours. At one point the buddy who offered to “sell” you his truck (whether or not he actually has one) says, “Man F-350s are garbage and always breaking down. Won’t you just take mine off my hands for 12, thousand,” and it just so happens that he said it loud enough for your neighbor to hear. The next day you go to your neighbor and go, “$25,000? That’s a pretty crazy ask. One just sold for $12k. Would you take $10,500?” If your neighbor ends up selling to you at this ridiculous price, congratulations, you have convinced your neighbor that his commodity was worth less based on chatter alone and scored a wicked deal. This is the basis of a ladder attack, and it only becomes more effective the more people collude with each other. At this point, Saudi Arabia is absolutely pissed because it believes that Canadian Natural Resources and Suncor Energy are working together in Canada to influence markets by selling those “synthetic barrels.” Also just in case, no not synthetic like what you may put in your engine, but synthetic in the sense that the volume of oil they are shorting does not even have real world barrels to back it up. If Saudi Arabia is right, these companies likely won’t go down. In fact, this same scenario was the setup for the Gamestock fiasco from a few years back. Investors believed naked short selling had occurred and ladder attacks pushed the price lower so those options were always in the money. If the investors were right, the SEC has turned a blind eye, or taken a cut of the manipulated profits. I only bring this up to consider what exactly will happen in the context of Saudi Arabia. It’s one thing if US regulators conduct or ignore blatant scams within their own borders. It’s another thing if Saudi Arabia has to step in and take action. What does that look like? Well, we have talked about that possibility plenty in recent weeks, and it probably looks a lot like repricing oil in anything but American dollars. People will only take the raw end of a deal for so long, especially if it interrupts something that accounts for half of your country’s GDP.
But folks that is all we’ve got for this episode. I know we really only hashed out one topic that may not even have full validity, but it raises concerns that have been valid for a while. Whispers in the energy space have alluded to open market manipulation. Whether or not that is the case, it is still a situation that deserves a little bit of attention. RARE PETRO believes that it is important to understand all aspects of energy because it is only a matter of time before any of the information you have learned here becomes applicable. This has been Tavis Kilian with RARE PETRO and until we see you next time, take care everybody!