Join your host Tavis Kilian as he looks at the most important statistics, Civitas’ dash for dominance, and big money bets on oil.
Alrigthy everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another STELLAR episode of Monday Madness on June 7th, 2021. I don’t know what the weather was like where you were, but it is finally summer here in Colorado! Here on the front range, it was able to pop through that 80 degree barrier and things were getting toasty. Time to bust out the shorts, sprinklers, and burgers because that good sunshine is here and it’s time to soak it up! But I know you didn’t come here to listen to me make small talk about the weather like I’m some college kid on spring break in Miami, you came here for the hottest news surrounding the oil and gas industry.
To kick it off it’s time to see if oil has not only punched through $70, but if it has stayed there. We’ve seen a few early spikes in the previous weeks, but nothing that stayed above for a significant amount of time. Well I’ve got good news and bad news. The bad news is that it topped out at $69.75 before falling again. The good news is that it hasn’t fallen lower than $69 at all this Monday (at least since the recording of this podcast). This is an improvement over previous weeks because we’ve tested $70 before, but the usual response is a drop to the $66-$68 range before trending back up. To me, that means we continue to test $70, and there is enough pressure to eventually push it through the $70. I’m not saying it is gonna be this week or in a month, but I am confident that we will push through soon. Still, we don’t want to get too greedy as it was only May 20th that the price had dipped to $61.94. When you frame it like that, $69 doesn’t sound too terrible. I think at this point we are starting to see pressure from a fundamentals level stemming from a geopolitical reason. As more and more drilling, or really any oil and gas activity for that matter, gets banned or restricted, the less we are able to replace reserves domestically. By that, I mean companies are probably working through a lot of their wells as they approach the end of their lifespan given current technology, and have not had the chance to operate on public lands or other locations they may have been planning to develop. Inventory reports have been mostly negative this year. One glaring problem with this theory is that the rig count continues to climb which brings us nicely into the next statistic.
Like I was just saying, the rig count has had a pretty good year so far. Up until this point, only 2 weeks of negative change that were tied at only one rig lost. Not too shabby if you ask me. If you look at the net change for 2021, you would see that we are up 105 rigs since the start of 2021, and up 172 rigs on the year. Still, the average change since the start of this year is about 4.75 rigs per week which is incredibly modest. Unfortunately, the most recent report revealed that another rig has fallen. Not good, but again, only 1 which brings the cumulative negative total to 3 rigs, which is still easily displaced by a single average week. From a major basin perspective, the Haynseville added 1 to bring its total to 48, and the Ardmore Woodford added 1 to bring its total to 2 whole rigs. If you aren’t familiar with the Ardmore Woodford, it is a small gas field in Southern Oklahoma that doesn’t see a ton of action these days. Still, they doubled their drilling activity which is significant. Otherwise the Permian lost 1 falling to 232 rigs, and the Granite Wash of North Texas and Oklahoma lost 2 leaving them with only 1 rig. From a state perspective, New Mexico is up 2, Louisiana is down 1 and Texas is down 2. Really no other significant changes in the other categories as it is just a net -1 difference and most things remain unchanged. Not a bad report, but definitely underwhelming considering the momentum we’ve been gaining throughout the year. Let’s take it over to our inventories.
If you didn’t catch it, RARE PETRO released a short written segment called “Thirsty Thursday” this past week that walks you through just how much of the inventories we have drunk through as a country. Make sure to have a cold one ready for this Thursday as we may be releasing that segment once more. Still, to recap the API reported a 5.36 million barrel drawdown and the EIA reported a 5 million barrel drawdown. This is on par with drawdowns we’ve seen so far in 2021,and is the biggest one we have seen in about a month since May 4 which the EIA estimated was just shy of 8 million barrels. As for the refined products, oil was definitely the feedstock of choice as gasoline inventories increased. While the US is still technically within its 5 year inventory history, it is dangerously close to punching through the floor. California averaged $4.20 a gallon through Memorial Day weekend even though inventories are well within regular territory. This is a direct result of California’s voting for continued gas tax increases that does not require voter approval (2018) combined with the fact that there are just way more trucks than there are people willing to drive them which leads to a supply chain bottleneck. Propane, however, saw a little build which is appropriate for this time of year, but it is still a bit more expensive than usual. While you may be paying just a little bit more for propane right now, some people feel that a shortage could be around the corner. Turns out everyone who is still staying in due to COVID is contributing to a high demand for propane through pool heating. Not only that, but gas companies are doing their best to stock up and make sure there is enough supply should another freeze occur like Texas saw earlier this year. Overall, a good inventory report, a less than desirable drilling report, and some strong WTI prices. I’m excited to see if we are above $70 per barrel by the end of the week!.
But that is the end of our statistics. For our stories, I feel like I have been neglecting news over mergers and acquisitions, so today we are starting out strong with the recently formed Civitas. If you don’t recall, Civitas is the resulting company formed from the Bonanza Creek and Extraction merger. Today, the company announced it would acquire fellow DJ basin operator Crestone Peak. This is a move we’ve seen from several companies lately. Buy out smaller companies, and become the ruler of the basin. Well, minus the merger of Houston/Denver Cimarex and Bakken based Cabot. Either way, this particular merger is of essential importance because it highlights the blitz towards ownership from the original Bonanza and Extraction partners. I’d even go as far to say that they merged to be able to afford more acquisitions like this Crestone Peak deal we are looking at this morning. I would not at all be surprised if they continued to acquire companies until it was just Civitas, PDC, and Occidental ruling all of the DJ. I don’t want to speculate any further than that because that feels just too far into the future to venture, but it is something to keep in the back of your mind nonetheless. Again, this isn’t specific to the DJ or even Colorado. It is merger season throughout the United States as prices continue to climb. Civitas will be paying for the Crestone purchase with just over $1 billion in stock. This should result in Civitas having an equity of $3.95 billion or $4.5 billion after debt. Civitas said that this deal will bring their production base to about 160,000 barrels per day and help them become a carbon-neutral producer. Big things are happening in the DJ, and I am excited to watch Civitas grow.
Next up I would like to talk gambling on wall street! Don’t worry, we will not be discussing GME or dogecoin, but rather the aggressive calls being put up in the commodities space. Many traders are beginning to secure $100 oil options as they believe both Brent and WTI may reach $100 per barrel as soon as the beginning of 2022, while still others are aiming a bit further down the timeline. The Wall Street Journal put out a graph showing the number of $100 WTI call options from 2020 to now. It stuck to 20,000 for most of the 2020 before ramping up and dropping from 35,000 to 18,000 in November. Then, as soon as prices started to climb into the $40 range at the end of last year, almost 50,000 contracts were secured over the course of a couple of weeks. Now there are almost 90,000 outstanding WTI call options with a $100 barrel strike price. For those of you who may not be so well versed in options, here is what that means: a significant amount of people are bullish enough to put money down now on bets that oil will be $100 by some point in 2022. If they are wrong, they cover the contracts and lose the money. If they are correct, they would likely make insane profits as these goals are pretty up there and out of the money. Stil Adam Webb, the Chief Investment Officer of Blue Creek Capital management said that these calls are a “no brainer” as the company sold many of its put options to fund the purchase of even more $100 calls which he judges to be unsustainably cheap. Other analysts like Natasha Kaneva of JPMorgan say that it is all but impossible, but it would still take a lot of pre-pandemic demand to push that price, and Iran striking a nuclear deal with the US would put even more oil on the market. As it stands, December 2022 contracts are the most popular WTI call accounting for 60,000 outstanding options responsible for 60 million barrels of crude oil. Still others are doing their best to trade in the money like Westbeck Capital Management. They have sold their $65 Brent calls for December 2022 and are using the proceeds to buy $80 strategies all around, but they all see a common finish: oil prices higher than they are today. But, that’s just what the execs and suits say. RARE PETRO is more interested in what you have to say. Hey. Yeah. I’m talking to you listening to this podcast. Believe it or not, I don’t do this to hear the sound of my own voice, we actually do this to keep you in the know and offer free value and information to the public. Still, we want to voice some of your opinions on the podcast. So here is the big question: where do you think oil prices are headed? Are we bottomed out with nowhere to go but up? Will the global environmental movement kill the industry and tank the price? We want to hear your input. Go ahead and leave a review and email me at email@example.com for a chance to have your opinion featured and not only that… you will also be entered into a drawing for a gift for us to express our thanks from hearing from you. That’s right, you wanna earn some RARE PETRO swag? Email us with the name you left the review under, or heck, I’ll meet you halfway if you simply e-mail us, and your opinion could be featured on the show as you sit at home listening with your favorite RARE PETRO swag. Again, email us at firstname.lastname@example.org to tell us where you think oil prices are headed and why to be featured on the show and maybe earn some gear. I’ll be bringing this new promotion up every week with a new question, so don’t miss out! Thanks again for your continued reviews, engagement, and support. We couldn’t be here if it wasn’t for you. I’m Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!