Cracks in the Transition – Monday Madness: Mar 21 ’22

Posted: March 21, 2022

High energy prices are forcing everyone to reconsider what they thought they knew about the energy transition.


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Audio Transcript

Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on 3-21-22. I’ve only been back in Colorado for a week now and I’ve already seen two separate snows, one of which is going on right now! I forgot how quickly the weather could change, and I gotta say, I missed it. It’s nice to be back in a place that has 4 seasons, and even nicer to know that I may have dodged the Bakersfield summer which I’ve only heard described as “miserable.” Even so, I shouldn’t celebrate too early as you never know what opportunities will present themselves. But you didn’t come here to listen to me rag on Bakersfield. There’s enough people in California who can do that for you. You came to hear the biggest statistics in the world of oil and gas, so let’s get down to it!

Commodity prices looked like they were finally settling down, but we may have hopped out of the frying pan into the fire. Last week finished off with WTI prices being in the neighborhood of $105, but today they have pushed back up to $110. I’m not exactly sure what brought WTI prices back down so low considering the conflict between Russia and Ukraine continues, but those sub $100 prices didn’t last long. The spread between WTI and Brent has narrowed to about $5 again, so I am excited to see how that relationship develops around the conflict. Natural gas saw a little 30 cent bump last week, but now it seems to be pretty stagnant in the neighborhood of $4.800. I still believe both of these commodities are undervalued as the past 2 years of inventory trends have pointed in the downward direction, but hey! I’m getting ahead of myself. We’ve gotta look at the rig count next.

Last we’ve seen some double digit change in recent weeks, but that ends here. Although it looks like some folks were eager to begin capitalizing on supply issues, this week there was no change to the rig count. It remains at 663 rigs which is 252 more rigs than we had this time last year. Basin by Basin we also have very little change. The Ardmore Woodford and Haynesville added a rig each to their totals. The Eagle Ford and Williston kept that balanced out as they each lost a rig. State by state isn’t much different. Louisiana is the only state to add rigs with 2. Then New Mexico, North Dakota, and Pennsylvania were responsible for three lost rigs. The offshore total is back up a rig bringing it to a total of 12. The new rigs seem to be focusing on gas and will be drilling directionally. Rather underwhelming report given the times we live in, but hey, it makes sense. You don’t want to play your hand too early because drilling new wells requires commitment and time, especially with steel and labor shortages. If everyone hops on the train right now and prices collapse, there are bound to be lots of awkward meetings with the investors that had to be convinced to loan money right now.

Lastly for statistics is the inventory report. As always, these are better enjoyed on the RARE PETRO website with graphics to better highlight what I’m trying to explain. Here’s the quick and dirty of what you may have missed: The EIA predicted a small draw of 1.375 million barrels which sounds totally reasonable given the impending supply shortage. Unfortunately, they were quite incorrect as the actual build was just shy of 4.5 million barrels. The API originally predicted a slightly larger drawdown. They too went the wrong way as they reported a build, but slightly smaller than the EIA at 3 and three quarter million. The most likely reason we saw a surprise build in inventories is due to recent Chinese lockdowns. COVID cases have been surging, but folks are complaining about lockdowns, so it will be interesting to see what the government does in response. Either way, lockdowns lead to a decrease in demand for energy and goods, so oil is likely trading at a discount right now. Russia is expected to lose 3 million barrels per day capacity in the near future which correlates to roughly 3% of world demand. 3% short on demand everyday is certain to have an impact on the markets. Gasoline is exactly where it should be right now, but it is anticipated that it will be much lower come summertime. This past week’s drawdown was 3.6 million barrels, one of the largest drawdowns we’ve seen in months. Gas prices saw temporary relief last weekend. Hell, I was driving back from California and gassed up in Grand Junction. I went inside to grab a quick snack, and the lady at the register said, “Good news! Gas just fell 10 cents.” It would have only saved me $1.20, but it still blew my mind how quickly those prices can change. Unfortunately, that decrease was short lived as gas prices are now back up and looking to compete with all time highs from 2008. The cheapest possible regular grade gasoline is $3.796 in Kansas while the most expensive is $5.785 in California. Distillates are fighting for their life as they try to pull back up into a historically normal range. Strangely enough, propane is the bad boy of the two this week as it falls even further away from historically normal ranges. Keep an eye on the larger time frames because it is entirely possible (and maybe even likely) that these commodities will be in short supply.

Energy used to be cheap. Now the general public is dealing with the consequences of limiting domestic production. How much more expensive will energy have to become until we begin to develop domestic resources? There is already plenty of talk around the world looking to deal with energy shortages as we are now almost a month deep into the Russian invasion. This is what today’s stories will mostly be focusing on. We will start in the East with Germany and work our way back home. Right now Germany is struggling with weaning itself off Russian energy. As it stands, Germany is the biggest natural gas consumer in Europe and the seventh largest in the world, but they are almost entirely dependent on Russia for that Energy. Ever heard of the Nord Stream? I’m talking about the first pipeline that delivers loads of energy to Europe through Germany, and that second expansion, the Nord Stream 2, which allowed Russia even more capacity. Pair massive energy capacity with energy dependence, and you get geopolitical leverage. Russia knows that Germany (and much of Europe) needs its supplies, especially during the energy crisis that has been ongoing. Germany’s solution has been to pivot to Qatar for LNG deliveries. Qatar has been investing in conventional energy and decided last year to expand its LNG infrastructure through 2025. This looks to be a decision that will pay itself off sooner rather than later. Imagine that, investing in conventional energy despite the energy transition. Germany has strong goals to become mostly renewable as soon as possible, but it has also just announced plans to build two LNG import terminals. Natural gas is going to play a huge part in the energy transition. Agencies like the EIA have known this for a long time, and an energy shortage seems to be waking some people up from their well meaning yet delusional dreams.

Next up on the chopping block is the UK who will be scheduling the first oil and gas licensing round in 2 years. This is especially interesting when you consider the fact the UK was very close to banning new permits in the North Sea only a few months ago. They were looking to immediately pause all licensing and ban all permits from 2040 onward. As you may have guessed, the energy shortage has caused them to change their minds. Boris Johnson did make a recent trip to the middle east to visit leaders from Saudi Arabia and the UAE, but rumor has it that the hosts were not interested in sharing their supplies. Imagine that, your country demonizes conventional energy and no one wants to help when you need it. Obviously, the relationships are much more complicated than that, but the Middle East has also ignored the US’s calls to produce more whether or not they actually have the capability. Still, the UK is maintaining its goal of an energy transition. This week the Oil and Gas Authority will be renamed to the North Sea Transition Authority while the government drafts what they are calling “climate compatibility checkpoints.” Interestingly enough, they have recently revised the checkpoints to include stipulations that allow regulators to overlook environmental considerations if there are national security concerns. The cracks in the energy transitions are starting to show, and it looks like we will be using more natural gas than initially anticipated. Energy independence is sure to become a hot topic of the decade as these past 6 months have been terrible for energy and its users, and the pandemic certainly did us no favors. People are realizing that it is much easier to say you care about minimizing environmental impact or whatever metric you might use, but much much harder to put your money where your mouth is when the bills start to go up.

In that same idea, I’d like to quickly mentioned Engine No. 1, the activist investor group who took on ExxonMobil to try and implement better strategies for the energy transition. Basically it claimed Exxon, a company who made money producing energy, had an outdated business model and the focus on “fossil fuels” threatened future returns. If you’d like to learn more you can search for it on our website as I have talked about this group before. It turns out even they are not immune to the greed that comes with higher energy prices. The founder of the firm, Christopher James, has shifted his tune from sequestration, to limitless American oil production with a side objective of lowering emissions. As he says, “The realization that dependence on oil threatens not only the environment but geopolitical stability should spur businesses and consumers to consider the full spectrum of energy sources without ideological bias.” While that seems counter intuitive, it is just more evidence that oil and gas serve a purpose and will always have a role in our energy systems and world.

What do you think? Is this spike in energy prices forcing people to look at our energy sources more critically? Go ahead and share your opinions with us by emailing and we will feature them on the next episode of Monday Madness. Be sure to follow this podcast as Basin Breakdown will be out very soon, and another segment will be tested in the near future. I’m really excited about it! Other than that, thank you for taking the time to tune into this episode, and until we see you next time, take care everybody!


Related Tags: china | russia | ukraine

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