The day the US said no to Russian oil.
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Hello everyone and welcome back! This is Tavis Kilian with RARE PETRO bringing you another weekly episode of Monday Madness being released on… Tuesday. I ate a can of tuna on Sunday evening and woke up early on Monday with some stomach pain. As I was sitting down to write this script, my stomach decided that it needed to get the tuna out immediately so I ended up taking the rest of the day as a sick day. Fortunately, I’m feeling much better today, so here I am bringing you the news and statistics that you’ve come to expect from this podcast.
First, commodity prices. Last week WTI was hovering around $110 a barrel. This week is a much different story as it hovers around $120. Just earlier today we were mere cents away from a $130 barrel. It seems that the price goes higher and higher the more serious folks get about sanctioning Russian energy, which makes sense. Russia is the 3rd largest producer of energy in the world. If we were to stop consuming Russian energy, others would have to pick up the slack in supply. These are the fundamental understandings of basic economics. At this point, you might be asking: “Well then why hasn’t natural gas gone up as severely as oil?” That is an incredibly good question! I asked myself the same question because I have a position on natural gas and expected the prices to skyrocket. While I haven’t found any definitive literature on the topic, there has been one theory discussed that I think is pretty damn plausible. There are only so many LNG tankers in the world, which limits just how competitive these shipments can be. Sure, the US may have loads of natural gas that it could supply to the rest of the world to ease supply issues, but all that gas does no good if you can’t mobilize it. This bottleneck could actually be suppressing those prices because the commodity just isn’t as fluid as the others. Either way, the cost of energy will be going up because the cost of oil is also going up.
Next up is the rig count. You might expect a stampede towards any producing field in the midst of these prices, but that isn’t exactly the case. Last Friday’s rig count reveals a straight-up goose egg in net change for the US rig count. The Canadian and international rig counts did even worse posting up single-digit negative numbers, so it could always be worse. The Haynesville was up 2 rigs, and the Permian was up one. Otherwise, the Ardmore Woodford and Arkoma Woodford each lost one. State by state changes revealed that New Mexico was up 4 and Louisiana up 2 while Texas was down 4 and Oklahoma down 2. The offshore environment saw no change. A rather slow report, but perhaps we will see better results on Friday.
We will wrap up our statistics section with the inventory report! As always, you can find the inventory report on our website www.rarepetro.com where there is a new cocktail recipe every week along with plenty of charts and graphs to help you better understand these commodity prices. If you didn’t catch it, here is what you missed: The EIA predicted a build of 2.75 million barrels which would have been smaller than last week’s reported build of 4.5 million. Instead, they ended up reporting a drawdown of 2.6 million barrels. Last week we saw the API reporting exaggerations of the EIA’s results. This week is no different with a reported 6.1 million barrel drawdown. This leaves the United States just below the historical 5-year range. Normally, inventories would start trending upwards around this time, but it is possible that the conflict between Russia and Ukraine will be reallocating some energy resources internationally. Gasoline continues its downward trajectory to lower than historical ranges. This week’s draw was only about 500,000 barrels, but it certainly still had an effect on gas prices. Well… we can’t blame the inventory decrease entirely. Geopolitical events are pushing the cost of energy higher, and oil increasing in price means gasoline increases in price. This is why gas prices are up 18.5 cents on the week, the biggest increase of 2022. Gasoline is now becoming as expensive as it was in 2014. Propane is edging its way lower than we’ve witnessed in the previous 5 years, but not as dramatically as distillates. World distillate markets are still out of whack, and local inventories are continuing on their expected downward trajectory, just much more aggressively than we have ever seen. Ultimately, we are being threatened with all types of energy shortages in the near future.
But that is all we have for our statistics. The big news story of the day is the new announcement from Biden: The United States will no longer be importing oil from Russia. The United States is taking this stance because… well I’m not sure why. I don’t want to say cancel culture has gotten out of control, but the entire world is removing whatever business it may have in Russia. IKEA shut down its stores. Cosmetic company Estee Lauder will stop distributing its products in the country. American liquor stores were removing vodka from its shelves despite the fact that it may not actually be Russian. Now, the president of the United States has committed to stop purchasing Russian energy. Of all the things I just listed, only the latter will have a significant impact, but even then it may not be a huge problem for Russia. China has already committed itself to buying Russian oil, even after bank accounts were frozen. While it is difficult to negotiate a payment plan, Russia seems to be comfortable trusting China, and China seems to be incredibly happy to have access to cheap and abundant energy. That relationship should at least raise some eyebrows. I doubt China will be sending troops to Eastern Europe to aid in any sort of military conflict, but it is naive to think there isn’t a good relationship between these two who both have a common economic enemy: the US dollar. All of these are concerns at the international level. Is there any concern for domestic markets? The president said, “The decision today is not without cost here at home. Putin’s war is already hurting Americans at the gas pump. I’m going to do everything I can to minimize Putin’s price hike here at home.” When reporters asked what he was going to do about rising prices the president responded that he “can’t do much now” and made sure to reiterate that the high prices are Russia’s fault. President Zolensky has already expressed his gratitude on Twitter saying, “Thankful for US and @POTUS personal leadership in striking in the heart of Putin’s war machine and banning oil, gas and coal from US market. Encourage other countries and leaders to follow.” Despite Zolensky’s thanks, those reporters were right to question domestic energy costs. How exactly will we control those? What is going to stop gasoline from skyrocketing in price? If I had to put money on it, I would bet that the Biden administration is going to double-dip into our emergency oil reserves despite there not being an actual emergency. One could pop up now that we are taking aggressive action against the Russians, but it seems inappropriate to tap back into that emergency supply. Not to mention that it did almost nothing to stop gasoline prices from increasing. So… what other short-term solutions exist? There really aren’t any. Buy boatloads of oil from China? Well, one they may not be willing to sell to us, and 2, that would still indirectly support Russia. Dump trillions of dollars into renewable energy independence? You know why that wouldn’t work if you’ve been a regular follower of this podcast. There really isn’t any good short-term solution. At this point, there is only one truly good solution. Creating a favorable environment for domestic production. If we do that, we can start to sow our energy seeds. By that I mean drill some more unconventional wells, and tap into conventional reservoirs that may not have been profitable at $60. It doesn’t help for at least another year to two years because it takes time to bring a significant amount of oil back online. It takes time to drill and complete wells, and will only take longer considering the steel shortages, supply chain disturbances, and total lack of labor. These next couple of years is likely going to be a time of incredibly expensive energy. COVID primed this situation and international conflict involving a world superpower only makes it that much worse. The sooner we pull our heads out of our rears and work towards energy independence, the better it will get for the American population.
But I think we should stop it there. Any further down this path and we start to get too political. We like to present the facts and sprinkle in some speculation over what we believe the future may hold, but we do have a little bias. Keep in mind that we also spend lots of time researching history, markets, and all the trends in between, so these aren’t baseless guesses. If you’d like to learn more about the world of energy, we encourage you to go to our website www.rarepetro.com to explore dozens of hours of video, audio, and written content. We release content almost daily, so go ahead and follow this podcast and our page on LinkedIn. We love learning new things and getting a leg up in the world of energy, so join us on this journey of self-growth. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!