Investing in the future of gas, an intimidating currency, and the decline of the petrodollar.
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Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you a fresh new episode of Monday Madness on March 28th, 2022. A fresh new week is always a great opportunity to get into some amazing things. The coolest thing about self growth is that you can keep failing and failing. All it takes is another try to hop back on that wagon. Maybe this is that successful attempt at cementing a habit. You never know until you give it a shot. But come on, this isn’t “Monday Motivation.” This is “Monday Madness” where we have to discuss the craziest happenings of the energy world, not self improvement. That’s just a little bonus you get for continuing to listen to this podcast. Go ahead and frac that follow button so you never miss an episode.
Now, the commodity prices. WTI is testing new highs hard right now. A couple weeks back it was $120. After falling back down to $100, it went right back up to about $115 before falling to the $110 range. Right now the price is about $107. I predict that this price will fall back to about $100. If nothing changes between Russia and Ukraine, I believe the price will once again test that $115-$120 range and quite possibly make it through. No solid price point right now, but things might get expensive soon. Believe it or not, natural gas prices went up significantly last week. Last week opened just under $5. At present it is at 5 and a half. It seems that severe energy shortages and new agreements to sell gas to Europe boosted the price, but there’s no telling just how high the price might go, or just how low it might fall for that matter. We are living through volatile times, but if I had to predict, energy commodities will be increasing in price. Tough to say too much more.
Next up, the rig count. Previous weeks have been either quiet or bountiful. This is one of those bountiful weeks. 7 new rigs bringing the total to 670 total rigs which is 253 more rigs than we had this time last year. The most improved basin this week is the Permian (of course) with 3 new rigs. The Eagle Ford, Granite Wash, Haynesville, and Williston each saw a 1 rig increase. The Utica dropped 1, and the Cana Woodford dropped 4 despite growth in recent weeks. State by state Texas is dominating with 6 new rigs. Next best is Louisiana with 2. Otherwise it’s mostly quiet. The offshore environment sees 2 new rigs moving the total to 14. Great week for the gulf. Overall these new wills will be targeting oil with an even split of horizontal and vertical wells surprisingly enough. I’d also like to mention Canada dropped 36 rigs down to 140. Brutal week for the friends up North. Overall this has been another great year for the rig count, so let’s hope that continues.
Our last statistic to look at is the inventory report. You can read it on www.rarepetro.com as it is a great report with lots of visual resources that is best enjoyed with a cocktail. Here is a condensed version of what you may have missed from last week. The EIA predicted that there would be little to no change in the inventories. They were probably a bit apprehensive about predicting anything larger because the last inventory report blew their expectations out of the water with a more than 4 million barrel build. This time however, they reported a 2.5 million barrel draw. The API also predicted a week of no change, but they reported an even bigger draw at nearly 4.3 million barrels. The world is mostly out of lockdown. Russian oil is soon to be off the US market (at least on paper). American policies are against the production of clean domestic energy. If the US is able to construct infrastructure to supply energy to the rest of the world, it will likely only get worse. At this point, it would not be surprising for Biden to dip into the Strategic Petroleum Reserves yet again in an attempt to bring more crude to the market, despite it being anything but an “emergency” at this point. If it is an emergency, it is one the current administration has crafted. The SPR is to be used for emergencies. Y’know… wars. Not to try and lower gasoline prices by 2.6 cents. American inventories have been trending downward since 2020, but it now looks like it is leveling out just below the bottom of the historical 5 year range. Gasoline inventories are somehow in the middle of where they should be despite prices being absolutely through the roof. Still, it experienced a drawdown of almost 6 million barrels. This is not as steep of a drawdown as it was this time a year ago, but it is still significant. As you might imagine, high oil price paired with a drawdown has pushed the average price of gasoline even higher. The national average is now $4.236 which is $0.693 higher than the prices were a month ago. Expect prices to get even higher as the price of oil does the same. Distillates continue to drop lower. Even if inventory levels were to remain stagnant for weeks, it would still fail to reach regular historic inventory levels. Propane however has made a pleasant correction and is now right up against the bottom of the historical 5 year range.
But that wraps up all the statistics. Time to take a peek at some current events. Last week we talked a little bit about LNG transport to Europe, and we even alluded to it while discussing commodity prices. At this point most everyone is aware of the energy crisis in Europe, but there’s just one teeny tiny little problem: the supporting infrastructure does not exist. Not only is the European market begging for more Floating Storage and Regasification Units (also known as FSRUs), but they are full steam ahead on constructing more LNG import facilities. While no significant progress will be achieved for years, it is a brilliant idea to begin now. Energy organizations like the EIA have acknowledged the tremendous role natural gas will play in the energy transition. Even Germany has wisened up. They announced they would be building 2 new LNG terminals that Shell will be servicing with gas so that Germany is not totally dependent on Russian energy as it is now. Like I mentioned, these projects and shifts take time, so it doesn’t put Putin in a hard place in the near future. This means Europe will still consume a decent amount of Russian gas because… Well… they need it. This means that countries like the US are immune to Russian negotiations over energy, right? Well, even that is changing which brings us to our next story.
Russia needs to exert pressure onto countries like the US who are energy dependent and against their invasion of Ukraine. Russia calls these countries “unfriendly” and has an extensive list. Russian news agency TASS has quoted a Kremlin document as saying: “The Russian government together with the Bank of Russia and Gazprom PJSC should implement a set of measures on changing the currency of payment for natural gas supplies to the countries of the European Union and other states that imposed restrictive measures against the citizens of the Russian Federation and Russian legal entities, to the Russian ruble.” This is a direct challenge to the petrodollar. If you are unfamiliar with the concept of a petrodollar I encourage you to go to our website to find old content where Anthony McDaniels actually covers the subject. Basically, the world trades oil on the dollar which used to be a great and strong currency back when the system was established. It gave the dollar a reason to be relevant and justified the dollar debt that the rest of the world held. The dollar was a strong reserve currency, and this system worked for years. Now we are seeing organizations who want to challenge that notion. Russia is fully aware that other countries need their energy in the short term. If they can get other people to trade energy commodities on the rubles, it strengthens their currency that much more and benefits their energy activity. While the ruble is down almost 20% since this all started, it is not totally unsalvageable as a currency. Russia wants the ruble to remain, and trading oil on a ruble contract gives them that much more influence and power. I do hate to mention the slippery slope as it is a logical fallacy. However… If Russia is able to secure a deal like this, why couldn’t other countries? If Russia can convince other countries to purchase energy in rubles, China should have no problem convincing parts of Europe and Asia to trade oil on a Yuan basis. Now we have a new market where Russia and China can set the terms of energy trading for a significant portion of the market. If you doubt this for a second consider some other players. If Iran had the opportunity to freely trade hydrocarbons through China and Russia without dealing with the nuclear and economic sanctions from the US, do you think they’d do it? I certainly think they would, and they would even be happy to pay a premium to do it. Economic sanctions used to be a great way to get the world to do our bidding, but the strength of the dollar is weakening which allows room for someone else to come in and shock the system. The petrodollar is being threatened, and this is likely an operation that has been in the making for years. These days man on man war is no longer the most effective way to dominate others. Economic and technological warfare are changing the game.
While I know that is a rather bleak outlook of the future, it is one that I am surely overhyping. The dollar isn’t in the toilet, but other people are looking to secure a significant piece of the pie. The best thing we can do is develop responsible and clean energy along with the infrastructure to support it. If we do end up chasing a future of solar, wind, and hydro we will need to ensure we have the proper backup of hydrocarbons and networks to transport them in cases of an emergency. Energy independence is a beautiful thing, and there is much to be gained if it can be achieved and exercised. The rest of the world would love to live like we do, so we had better produce those energy resources necessary in order to do it. But that is the end of this podcast. If you want to learn more about geopolitics, markets, and history be sure to hightail it over to www.rarepetro.com. We easily have over 100 hours of content for you to sift through. I personally guarantee you will find something you like. If you have any questions over anything energy related, email us at email@example.com and we will be sure to address it in a future episode. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!