A bumbling UK energy idea, back to 0 for Libya, and potential for decreased demand (thanks COVID).
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO on another episode of Monday Madness being recorded and released on June 13, 2022. It is starting to get hot out there! Between the yard work Friday, and some other outdoor activities through the weekend, I couldn’t help but wonder if gas use would go up in the form of air conditioning. Meteorologists have been calling for earlier than usual hot weather while utility companies simultaneously reveal that their gas supplies are tighter than usual. But you didn’t come here to listen to me vaguely talk about factors influencing commodity prices. You came for the details, damnit! The nitty-gritty data paired with an analysis of world events. This is the RARE PETRO podcast, and I think it is time to dive deep.
I haven’t yet peeked at the commodity prices today, so I will be just as surprised as you. The warm weather leads me to believe that things likely got more expensive since most other factors seemed to have remained constant. Unfortunately, it looks like WTI and natural gas have a bad case of the Mondays. Last Friday, WTI finished the day a little lower than it opened, but it was still above $120. Today we see some pushback as downward pressure keeps it at a cool $119. Again, Monday has the tendency to be incredibly volatile, so I wouldn’t be surprised if we saw a peak as high as $123 before settling down closer to $120. Anything can happen. Natural gas has had a rowdy month, so I think it is possible that we will see the increase in price slow a little bit in coming weeks. Last week it was as high as $9.50 before it cratered to $8.10 in a matter of hours. It’s looking like most of this week will be spent sometime between $8.50 and $9.00 with the potential to go a little bit higher. Whicher way you cut it, prices for energy are high. Pair that with the fact that supply chains are still in disarray and you can quite easily understand why we experience more expensive household items, food, and gasoline every day. Business as usual, but expect these prices to go up even more in the near future.
Next up is the rig count. It did seem as if the count was slowing down in recent weeks, but the newest report shows that we are back to pushing that total even higher. Six new rigs brining us to a total of 733 which is 272 more rigs than we had this time last year. The data shows that this growth was concentrated in 2 basins. First, the Permian who increased its total by 3 followed closely by the Eagle Ford who boasts 2 new more rigs. No other major basins saw any change. The state by state analysis seems a bit contradictory as Texas is down 1 rig. Seems most of the Permian activity is from the New Mexico side of the basin as they increased their rig count by 5. Otherwise, Louisiana and Utah were up one each. A rather quiet week of concentrated results. Of the 5 new rigs, all of them will be targeting oil and there is an equal split of 2 directional, 2 horizontal, and 2 vertical. The offshore environment lost one rig but is otherwise doing well. Not a bad rig count at all.
Lastly is the state of domestic inventories. We just wrapped up 1 full year of Thirsty Thursday reports and had a whole lot of fun doing so. Be sure to follow us on LinkedIn so that you are always aware of newly released content. Here is the important information from last week’s report. Last week I mentioned that it was possible we have broken out of a pattern of flip-flopping builds and drawdowns, but it seems I have jinxed it all. The EIA predicted a 2 million barrel draw but ended up reporting a 2 million barrel build. The API expected a slightly smaller draw, but they too were correct on the magnitude and wrong on the direction. While the predictions on draws vs. builds may lack accuracy, we can look toward recent history to make a prediction for the next few months. In June of 2021 there were several weeks of drawdowns above 5 million barrels as we got deeper into warmer weather and peak driving season. It is about time for families to be on vacation, for folks to take road trips, and for the sun to beat down on us. It’s likely that this season will be akin to last year’s. News outlets and utility companies are already warning of rolling blackouts. Sure, you may expect these in California or maybe Texas, but apparently, it could hit the Midwest… hard. Nuclear power plants are being shut down, coal is being erased from recent memory by modern-day thought-police, and droughts have left hydropower as an ineffective supplemental solution. Buckle up folks, because electricity is about to get expensive. Gasoline inventories decreased by another 800,000 barrels last week only adding to the upward price pressure. As if that wasn’t bad enough, the EPA released new standards for biofuel blending that are going to push the price of gasoline even higher. Corn is now as expensive as it was in previous financial crises. When something that is used to make gasoline increases in price, gasoline then increases in price. Dozens of small refineries asked for some exemptions as they were going through hard times, but the EPA told them to kick rocks. Unsurprisingly, gas prices are already rapidly getting more expensive with all grades of fuel 20-30 cents more expensive per gallon than they were a week ago. If this continues, the cheapest average price of gas at any state in the US will not be lower than $4.50 per gallon. Still, not all news is bad news. The Biden administration is reportedly looking into restarting some recently decommissioned refineries. Y’know, the refineries that struggled to stay open back in 2020 or were closed in favor of other power sources (or closed for no other reason than “fossil fuels bad”). If the refineries are able to get up and running, it will greatly increase our refining capacity and has the potential to lower prices a bit, but this solution still fails to address the root cause of decreased supply. Propane inventories are doing what they do best: chilling. Distillate inventories are finally beginning to increase which inspires hope. So far the seasonal pattern matches what we would expect from the past 5-years of data, just shifted a bit lower by some 5 million barrels. Hopefully, things start to get better soon, but supply chain disruptions and diesel shortages may also contribute to more inflation.
But there you have it! You are now well informed in the areas of commodities, drilling activity, and domestic inventories. It’s now time to look at some of our more interesting news stories starting with the latest attempt to reframe a problem instead of fixing it. It is no secret that the cost of the living in the UK has skyrocketed due to a slew of different factors. In order to fight rising power prices, the UK government is reportedly considering a restructuring of the electricity market. At present, the pricing setup makes use of British power prices which are heavily linked to natural gas prices. The UK expects that it will make use of more offshore wind and nuclear power in the coming decades so they hope they can dilute or even fully sever the connection to natural gas prices. When reading about this, the first thing I thought was, “Wow… this sounds foolish.” Why are we betting the farm on a future of greatly increased renewable capacity without first constructing those systems? Also, what exactly does this do to change the supply or demand of power? Energy prices are going up. Refusing to acknowledge the fact and hoping for more renewable capacity has not proved to be an effective solution for anyone thus far. I understand that they are willing to try anything, but some analysts believe that energy prices in the UK could go up another 40-50% by the time winter arrives. At that point, it makes sense that policymakers would consider anything that would lower energy prices, but I doubt these solutions will be as useful as they hope. They need more reliable power, and they need it now.
Next a short update on the Libya situation. It was either last week or the week before that we talked about the reopening of Libya’s largest oilfield, the Sharara. Unfortunately, that lasted a matter of days as it is now shut down once again with the addition of 2 more closed export terminals, and threats of closing a third. This still revolves around faction groups who are angry that the newly elected minister has not yet taken office as the existing minister refuses to transfer power. Though this conflict has gone on for 2 years and has been mostly peaceful, it may not remain that way for much longer. Energy prices are high, and because the profit distribution is already poorly mismanaged, I can imagine that the minister likely wants his disproportionately large part of the profit pie. Libya has a history of conflict that usually leads to reduced oil output, but I can’t imagine things will remain calm in this situation much longer. Libya’s oil production is now estimated to be a measly 100,000 barrels per day.
Also, I’d like to quickly mention the evolving COVID scenario in China. In the midst of easing Shanghai lockdowns and the recent relaxation of rules surrounding nightlight in Beijing, a new strain has emerged. China is now rapidly testing as many people as they have kits, but it means that another lockdown is not off the table. China’s zero-tolerance approach is leading to numerous spot shortages of many different products and is producing more and more skepticism inside its own borders, but a lockdown would, yet again, diminish global demand. If it does, it is likely we would not see prices react too aggressively as they are still buying plenty of discounted oil from Russia which can likely supply all the hydrocarbons that China might need. No one can be certain of future outcomes, but a significant shock to demand looms over us nonetheless.
I believe that is all the time we have for this week. Anthony and I will be recording another episode of the Wacky World of Energy later today, so keep your eyes peeled for the release of that segment later this week! Otherwise, we always have plenty of great content being released almost every weekday, so you will want to follow us on LinkedIn, or just peep our website each morning. We’ve got articles that would certainly interest anybody, so get to digging and find something enjoyable that wil expand your knowledge base as an energy professional. We love growing and learning new things, and we hope that you care to join us. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care everybody!