Happy Pi Day! See what’s new in the world of energy.
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Alrighty everyone welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on 3-14-22, often known as pi day! It is a clear, brisk, beautiful day here in Colorado, and life is good. I have finally returned from California and spent this past weekend driving back. If you haven’t had the opportunity to drive the stretch of road between Vegas and Denver, do yourself a favor and give it a go sometime. There are some great stretches of the open road in Utah that run through some of the most beautiful desert rocks you could hope to see. But I know you didn’t come here to talk about travel. This just ain’t that kind of podcast. This is a podcast focused on all things energy, so let’s get started.
First, of course, we start with commodity prices. Crude’s hot streak towards the heavens seems to be calming down. The past week brought WTI prices from $110 down to almost $100. At the moment, the price is about $103. The biggest factor that seemed to lower the price stems from new COVID fears in China. Any further lockdowns from them threatens to lower the demand for plenty of goods and services. Still, WTI and Brent are likely going to settle higher than they were before this conflict was initiated. Natural gas has been ping-ponging around but seems to average $4.60. The US began to ship more LNG to Europe in an attempt to alleviate some of the shortages, but a bunch of independent environmental groups called out the banks funding these operations, and the shipping has since slowed. Sure it does have environmental impacts, but energy bills are causing some families to have to budget tighter and tighter. I hope Europe finds a way to alleviate that stress soon.
Next is the rig count. Last week we saw no net change and predicted that the high commodity prices would be bringing in a much larger count this week. That prediction holds true as the total went up 13 rigs to 663 which is 261 more rigs than this time a year ago. The Permian basin is the proud home of 6 more rigs while even the Eagle Ford saw some action with 2 rigs. The Haynesville also added 2, and the Utica 1. A state-by-state analysis shows that Texas is still king, and will likely remain so for quite some time. 12 rigs total in Texas with Wyoming and Ohio tied for second with one rig each. Poor little New Mexico found a way to lose a rig making it the only state with any activity to lose a rig. But they aren’t alone, the offshore environment even lost one rig lowering the total to 11. These new rigs are making hole that has a slight emphasis on oil plays, but gas is represented as well. They are almost all going to be horizontal.
Lastly, the inventory report. While I get you the quick and dirty details, there is a far better analysis and experience waiting for you on www.rarepetro.com as the Thirsty Thursday inventory report. Go ahead and give it a look this Thursday. Here is what you may have missed from last week’s. The EIA predicted a small draw of 650,000 barrels but actually reported a near 2 million barrel draw. The API made a prediction for a drawdown of a similar magnitude but reports the exact opposite with a build that is closer to three million barrels. According to the EIA data, we have spent more time in 2022 decreasing our domestic inventories. Even the occasional 2-4 million barrel build is counterbalanced and more within a matter of a few weeks. This leaves us just a little bit lower than the historical 5-year range, but on the low end nonetheless. Current world events are likely not going to boost our domestic reserves, especially since the US committed to banning imports of Russian energy. Gasoline continues its downward trajectory to lower than historical ranges. This week’s draw was 1.4 million barrels, large than last week’s by about a million. While we are currently within the historical 5 year range, the trendline suggests we might fall below in the summer. This is all dependent on how much consumers curb their consumption of gasoline which may not be much considering gasoline is an inelastic good. As long as you haven’t been living under a rock you have likely seen that gasoline prices are up all over the country. The current average for a regular gallon of gasoline in the US is $4.318. The cheapest gasoline is in Kansas at $3.817. Fortunately, the past few days have looked a little better since the Thirsty Thursday report was released, but gasoline is still pricey. Distillates took a heavy nosedive and propane seems to be following in its example. Worldwide distillate markets are still tight, and this will certainly factor into higher fuel and distribution costs all over. Inflation is here to stay folks. Still, keep your eye on the larger time frames. We reaped the benefits of incredibly cheap energy for 2 years. That was fun, wasn’t it? Now we have to deal with increasing scarcity. Buckle up, ladies and gents. It is likely going to be a wild ride.
But that is all we’ve got for that statistics section. Time to look at some news starting with some speculation over the energy transition. Billionaire hedge fund founder Sir Christopher Hohn says that he expects significant disruption in the demand for oil thanks to the Russian conflict. He is not the first to pose this argument, as it seems fairly reasonable from a logical perspective. First, the price of oil has to go up. Eventually, this form of energy consumption is so expensive that it ends up creating incentives to invest in other forms of energy like renewables. Sir Hohn is arguing that the world is far too dependent on foreign oil, specifically Russian oil in this case, and this will shock people into accelerating investment and research in green energy. The idea is that eventually this funding and research brings down the cost of renewable energy causing it to become cheaper than oil. Eventually, oil is displaced as an energy source and renewables are the new champion. As I said, this argument makes sense as it relies on some basic economic principles, but unfortunately, there are too many assumptions being made. The assumption that renewable energy can be used at large scales while simultaneously being more affordable than hydrocarbons. The assumption that crude oil will not yet fall again in price. The assumption that there are enough materials in the world to manufacture these renewable systems without becoming increasingly scarce and driving up the price. At the end of the day, renewables may be able to compete with a $120 barrel. Maybe they can even compete with a $100 barrel. Unfortunately, they cannot compete with a $60-$80 barrel (not at the moment at least). People have been arguing for quite some time that the cost of renewable energy is on par with the cost of conventional energy, but you have to keep in mind that there are a lot of subsidies at play that skew these numbers. Renewable technologies are often given extra funds from the government. This subsidizes some of the cost, and if ignored, makes them look far more effective as energy systems. Oil and gas sometimes get subsidized but in an entirely different way. Rather than being given extra funds, they are often charged less. For example, taxes may be slightly relaxed, or funds that were usually collected by the government will be ignored for a pay period. The government taking less money from you versus giving you extra money are both subsidies, yes, but worlds apart in difference. Don’t get me wrong, I am excited about this energy transition, but I am wary to agree with the folks who are saying this conflict will accelerate our adoption of renewable energy. Even Germany has stated they need to double down on renewables to become energy independent. I just don’t see it happening for a while, especially if the US is able to double or triple its output of natural gas over the next few decades.
While some people are claiming it is time for more renewables, leaders like Boris Johnson are considering talks with the middle east in order to source more energy. While the trip has not yet been confirmed, I would not be surprised at all if it actually took place. People are looking to replace whatever oil they were purchasing from Russia, so they are now knocking on anyone’s door who may be able to support them. One article I found wrote something that I found a little… peculiar. It reads, “…Saudi oil may not prove to be more favorable than Russian oil after the country just beheaded 81 people in a single day—the largest mass execution in the Kingdom’s modern history.” Looking into it, the people were beheaded on accusations of terrorism. I only bring this up, because the image of people freezing in their homes and saying, “well I don’t know… I just don’t agree with Saudi Arabia beheading terrorists so I don’t think we should buy their oil” is absolutely maddening. Beggars certainly can’t be choosers in this situation. While activists may have a problem with Suadi oil, many business owners and productive members of society would love to lower the cost of energy. One delivery company was quoted as saying, “In less than a year, fuel prices have jumped from £1.16 to £1.61. Because I cannot pass these costs on to our customers, I am having to swallow about 37% of my profit margin. It’s becoming really hard to keep my drivers on.” These are real problems that people are having, and the sooner we get off of our moral high horses, the sooner families can get back to living out of poverty. The increasing costs of energy are going to hurt a lot of people which is upsetting as we have the resources to slow that smothering inflation.
But folks that is all we have for today’s episode. The world wants more cheap energy, but we aren’t uncomfortable enough to produce more hydrocarbons. What do you think about the whole situation? We would love to hear some of your opinions and maybe feature them on the show in a future episode. Go ahead and write us at email@example.com and I will be sure to share your thoughts with the audience. Otherwise, you can always to www.rarepetro.com to find hours worth of content we have written over a 2 and a half year time span. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!