Join your host Tavis for a Monday Madness birthday, new potential legislation, and American piracy.
Audio Transcript
Alrighty ladies and gentlemen welcome back! Today is Monday March 15th, which makes this of course, an episode of Monday Madness. I know we usually kick things off with WTI pricing, but I’ve got another interesting statistic for you. This is the 52nd episode of Monday Madness officially making the segment one year old! The first one was aired on Monday March 16th of 2020 under the title of “Monday Mania” as I wanted to make a short show that covered the news headlines relating to the incredible inventory build that was a first response to COVID. Weird to think that here we are a year later, and things are seemingly getting better, COVID and oil wise. If anything, it perfectly encapsulates the dynamic and volatile world of energy, and we at RARE PETRO would like to extend our thanks for receiving your continued support. But I know you didn’t come here for me to get sappy, you came here for those incredibly revealing statistics and those fresh news stories. Let’s get right into it!
WTI pricing has made an excellent comeback in the past few months. A year ago today we were climbing the final peak before the historic drop and sitting at a price of about $53. Today, prices are at about $65 at the time of writing this episode. Those of you who have been listening regularly, or the others who do their own research, have noticed that there has been a build in inventories for the past few weeks. Why has the price not reflected this? Firstly, OPEC+ announced sustained production cuts, and that was a big rally point for the markets which continued to apply upward pressure. Secondly, I suppose I have to get into inventories, so we will tie it to WTI today. The most recent inventory reports from both the API and EIA show a 12.8 and 13.8 million barrel build respectively. Not often we see them with numbers this close together, but if you combine the past 2 reports from the EIA, we have added 35 million barrels to our inventories. Remember that 5 year averageI brought up a month ago? We were finally below the median of that range, but thanks to recent builds we are approaching the upper quartile of that average erasing almost 3 months of drawdown progress. Again, these are massive builds, so why have prices seemed to ignore them? Well, it’s time we pull an old episode out of the vault… Last week’s episode that is. I think one of the biggest factors at play here is further down the supply chain, like I mentioned with the massive gasoline draw last week. Well we lost another 12 million barrels of gasoline last week causing it to become increasingly scarce, and if you have been to the pump, increasingly more expensive. My little sister is still back in Iowa, and pump prices there are already up 30 cents on the month. I expect them to climb higher and higher as we have absolutely broken the floor on the 5 year average for gasoline. The low end of the 5 year average is somewhere in the range of 250 million barrels. We are quickly approaching 230 which is doubly bad as this is exactly the time we need to be reserving more and more fuel for summer travel. I don’t know about you, but I like taking road trips to national parks, over to friends places, or just out to nowhere when the weather is nice and the tunes are blasting. That will become increasingly more expensive if these inventories continue to drop as aggressively as they have been. In more dystopic terms, we are in the neighborhood of about 28 days of supply if all refining was to stop today… well, it already kind of has. We are operating at a limited capacity as that cold weather really did a number on Texas’s refineries, and other capacity continued to decrease through last year as more and more refineries closed. Let’s look at some other refining metrics shall we? Propane! I do like grilling in the summer, but we are skirting right up against the low edge of its 5 year average. Petroleum distillates, useful for automotive oils, jet fuel, or heavy duty lubricants and all things industrial, are also right up against the floor of the 5 year average. While these things are not falling as dramatically as gasoline, they all highlight the main issue at hand. The demand for crude is still rising, but domestically, we are at a refining bottleneck. If prices of these refined products go up, I would not at all be surprised if oil prices also went up a little more as those downstream compete for the cheapest price of oil to flip as gasoline. Again, that is just a healthy dose of speculation as inventories could continue to break above that 5 year average, and the vast oversupply of oil could overshadow growing demand for these refined products. If you take anything away from this segment, fill up your tank as soon as you can because gasoline could be getting a whole lot more expensive.
Whew! The combination of WTI pricing and inventories got a bit long and convoluted, but we are finally past it. These statistics would not be complete if we skipped over the rig count, so let’s take a quick peek, shall we? Way back when the federal drilling moratorium was announced, I predicted we would hold steady or grow until about the middle of March. Well, here we are on the 15th, and the most recent report from Friday shows that we are now down 1 rig. I hate it when I’m right. If we dive into the nitty gritty the Haynesville, Marcellus, and Williston all took a 1 rig gut punch. The Permian did add a rig bringing their total to 212, but who will be the winner of this episode’s “SECOND PLACE STUD OF THE WEEK?” Well, it was an absolute photo finish between the Cana Woodford of Oklahoma and the superdeep Utica of the Appalachian region as they both added 2 rigs. Ties like this come down to the greater percentage change, and the title goes to the Utica as they raised their total from 7 to 9 rigs for a 28.5% increase! While it is sad to see an overall rig decrease, it is only one, and I don’t want to discredit all of the incredible progress made in the past 10-12 months. But we have spent far too much time on our statistics, so it is high time we get to those news stories, eh?
As for the federal drilling moratorium, we’ve finally got some word! This moratorium was initially executed because it was claimed that legislation was outdated and needed revision. Apparently, what they really meant by that was that oil and gas is not paying enough. U.S. Senators Jacky Rosen of Nevada and Chuck Grassley of Iowa introduced the “Fair Returns for Public Lands Act.” The bill would mainly raise the federal onshore royalty rate 50% from 12.5% to 18.75%, or more simply, to match the current federal offshore royalty rate. This will only be applicable to new oil and gas leases moving forward. Additional changes include doubling the lease rental rate for the first 5 years from $1.50 to $3 per acre, more than doubling the lease rate for the remainder from $2 to $5 per acre, move the minimum bid from $2 per acre to $10, increase the rental and royalty fee for all reinstated leases to a $20 per acre rental fee and 25% royalty fee, setting a minimum $15-per-acre fee for expressions of interest in order to reimburse administrative costs, and a requirement for the Interior secretary to adjust these rates for inflation every 4 years. If you didn’t quite catch that, it just means more money for federal and local governments, although they already reap plenty of benefits from existing severance tax. Senator Grassley said, “Big Oil continues to take advantage of low royalty rates on federal lands. Congress has not addressed this issue for over 10 years and since then, these oil companies have deprived the treasury and the American people of billions of dollars. This is not right. It’s time for my colleagues in Congress to end this oil company loophole, end the corporate welfare, and bring oil leasing into the 21st century.” It all seems a bit dramatic to me, but these hikes are pretty significant. Fortunately, it is being implemented while prices are climbing a bit higher, as something like this last year would have completely disincentivized adding more American land to a portfolio in the midst of $35 oil. Still, if this bill is passed, it is only more upward pressure on prices as it will definitely hinder the rate at which people replenish their reserves. I’m curious to hear what you think. Please leave a review on whatever platform you listen to, or contact me at podcast@rarepetro.com. I’d leave to hear your opinions on some of these matters, and maybe incorporate an opinion segment where I talk about what you all have to say.
Iran has been popping up in the news more and more frequently and had a hand in our next story. A few weeks ago, a Greek tanker owned by a company known as Capital Ship Management Corp notified the US that it may have unknowingly loaded Iranian oil on board. Since Iran is under sanctions from the US, this oil may not be transported, but that hasn’t stopped Iran from coming up with clever solutions in the past. They turned off transmitters to float under the radar, swapped oil between ships, and forged documents to make it appear as if it is not Iranian oil being transported. Well, the United States decided they would like to detain the Greek ship and began conducting an investigation. Just after they started, an Emirati oil and gas company claimed that the cargo was theirs and sourced from Iraq, but did not disclose the supplier. After recovering their goods, they sold to an anonymous buyer from China. Whether or not Iran was directly involved has yet to be discovered, and might never be. Either way, Tehran said the seizure of the vessel was an act of piracy, but also noted that it was definitely not their oil. As a spokesman for the Iranian Foreign Ministry put it, “This shipment does not belong to the Iranian government. It belongs to the private sector.” To summarize, a Greek ship was afraid of potentially carrying Iranian oil, but an Emirati official claimed it was theirs, and that the oil had been sourced from Iraq, yet Iran had to chime in and claim that it definitely wasn’t theirs. Oil really is a global market. This is just another drop in the bucket of tensions mounting between the US and Iran revolving around energy. Iran continues to mention that they have lost some $70 billion in missed revenues thanks to the US, and repayment would be a prerequisite for returning to a nuclear deal. This whole thing is so convoluted, that I really have no idea where we go from here. Both sides want something that will please themselves, so I would be surprised if a compromise was reached soon. As for the claims of piracy, it would definitely be piracy if we commandeered the detained ship and sold or used the oil ourselves, but a simple investigation into the legitimacy of the oil seems a far cry. Really makes you wonder why Iran decided to say anything about the situation at all, doesn’t it?
But that is the end of this episode! Thanks again for a full year of Monday Madness. Again, if you have anything to say about the show, and want to get involved in the discussion, please email me at podcast@rarepetro.com, or follow us on LinkedIn to kick off a conversation whenever we post a new segment. You can find plenty of educational and enriching content on our website, rarepetro.com, so head on over there to learn more about the dynamic energy markets. This is Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody.