Join your host Tavis as he talks about the Eagle Ford’s deserved win, an international Venezuela Oil party, and coal’s dethroning.
Alrighty everyone welcome back. It’s me, Tavis Kilian, bringing you another episode of Monday Madness on this slushy Monday morning of March 22nd. A decent amount of snow fell again just after that big dump from a week ago melted, but things are so warm that it is already melting and heavy. But I know you didn’t come to listen to my small talk about the weather when you could deduce just as much by looking out of your window. You came here for the best weekly recap of all things oil and gas.
Of course we must kick things off with WTI pricing. Things are looking okay at $61.60 per barrel at the time of writing this script. This is a little below the trendline of recent months, but I don’t think it should cause anyone any alarm. Prices have been steadily climbing since the beginning of November and a few dips here and there didn’t stop anybody. If you look at a pricing chart for WTI over the past few months, you will notice at about the middle December through March, there has been a bit of a dip. In mid December it peaked at mid 49s before falling to 46, only to resume its climb a few days later. In mid January it almost hit $54 per barrel before falling to an almost even $52. February showed another 2 and a half dollar dip before correcting itself before it had the opportunity to fall below $60. March on the other hand had a little right at the start of the month, and about now as we are in the middle. It quickly rebounded from the dip at the beginning of the month reaching a high of $66.42 on the fourth. Then, it spent the 10th-12th hugging a $66 pricing point. Like I mentioned, the price is a little bit lower today, and this is the biggest dip we’ve seen since about August of last year, but I really don’t think this is anything to worry about. We’ve been covering so many things in the past few weeks that should be applying upward pressure. It looks like there may be a temporary ceiling at $66, but I am confident that prices will break through that. I feel that by this time next month, it is entirely possible that we will be in the neighborhood of $68-$70. I hope that doesn’t sound too crazy to you out there listening. In fact, it is a pretty consertvative estimate as prices have been going up about $6 per month since November, and we already saw near $66 per barrel pricing in the middle of March. I encourage you to make your own wager as well, and perhaps we will revisit in a month.
To follow that up we have the rig count. If you remember, I predicted that the rig count would go up or sideways until about the Middle of March, and until then we saw a few weeks of small gains along with a week of no change at all. I made this prediction in response to the federal drilling moratorium, and it seemed to go well until our episode last week where we fell a rig in the middle of March. If you remember, I reacted to it like it would be the beginning of many more weeks of lost rigs. So… what happened this past week? Well the most recent rig count shows that we are up NINE RIGS BABY! Man that last report really had my going. I was certain that this week would be worse, but I am so glad to be wrong. Of course the Permian was able to put up 4 rigs… we already know that if there is a big gain we are 90% sure to see it centered in the Permian, but what might surprise you is that New Mexico was responsible for the change. As a state, New Mexico tacked on 7 rigs while Texas lost 1. Big ups for New Mexico as 40% of the nation’s crude oil production on federal land takes place there. But, who cares that the Permian added so many rigs? I’m excited for the “Second Place Stud of the Week.” I can tell you the Williston put up a good fight with a positive change of 8%, but it was actually the Eagle Ford who netted a 10% increase! Congratulations to the Eagle Ford for somehow becoming this week’s winner. This is pretty atypical because the Eagle Ford is not as competitive a play as other gas basins. If you are looking for lower lifting costs, you would definitely find yourself in the Permian or the Marcellus. Hell, even the Bakken wouldn’t be terrible when compared to those two, but the Eagle Ford is not nearly as competitive on a cost per barrel scale. Don’t get me wrong, the Eagle Ford is home to some of the cleanest production in terms of low emissions, but to me it would make more sense to see a rig count increase in those other places I listed. Now the Eagle Ford has 2 more rigs up than the Marcellus Basin. What a report. If you would have told me that after the decrease last week we would have seen big gains in the Eagle Ford, I tell you what – I would have laughed in your face. Since this whole federal moratorium thing has kicked off, we are now up 33 rigs. Who woulda thought?
Lastly you know we have to talk about those inventories. We’ve seen some pretty terrible builds in recent weeks, so how did the most recent reports fare? Well, the API report shows a 1 million barrel decrease. Well, I guess that isn’t so bad at all. As for the EIA, it was reported that there was a 2.4 million barrel increase, which was below build expectations. So overall, not making too big of a dent in those huge builds we saw recently, especially if you look at the EIA data. I want to say that we are still in a sort of refining bottle neck, but even that seems to be improving. Gasoline, distillates, and propane all went sideways last week which improves their situation. They are now much closer to the center of the 5 year range, but still in the lower percentile. Gasoline is still about 10 million barrels shy of being within its 5 year range, but distillate and propane were able to level out before plummeting into record low territory. This still leaves things in a peculiar place as a week of change could make all the difference for crude pricing. For now at least, gasoline is still outside of the 5 year range, and our CEO actually forwarded us an article last week that shows March fuel consumption is almost average. This means that gasoline will likely remain lower than the 5 year average as more and more people drive during the approaching warmer months. But hey, if we learned anything from the past year (and the most recent rig count report) we should be prepared for a massive swing in either direction.
That is all I’ve got on the statistics side of things, so I think it is time we get into some news. If you’ve listened to this show for a while now, you know I am a huge fan of geo-political influences on pricing. Well we’ve got an interesting one coming in from Venezuela today. In August of 2019 the Trump administration imposed sanctions on all government assets as they refused to support a corrupt regime. Unfortunately for Venezuela, the State owns the Petroleos de Venezuela SA, or the PDVSA, which produces virtually all of the oil in the country, making it unsellable to the US. Today, it seems the Biden administration may be considering easing these sanctions, and President Maduro is excited for this opportunity. If you haven’t heard, Venezuela is in the middle of an economic crisis, refugee crisis, and political corruption that has lasted for many years now. There are plenty of interesting documentaries surrounding this topic and I definitely encourage you to spend an evening with one as it is some interesting stuff. If Biden is to lift these sanctions that were implemented against President Maduro, it may be possible for the country to gain an economic foothold. It wouldn’t do much, but it would certainly be helpful. President Maduro would like to capitalize on one of Venezuela’s largest assets: oil. Let’s look at Saudi Arabia. The EIA estimated at the beginning of 2020 that there was still 267 billion barrels in proven reserves. To be clear, reserves encompasses all oil that is economically viable to extract. If we were to look at resources… well that would be a much different story. So again, that is 267 billion barrels of oil in Saudi Arabia. In Venezuela, the EIA estimated there was more than 302 billion barrels of oil in the ground. If we were to look at that in terms of national production from 2016, Venezuela has enough oil to last them another 364 years given continued production. Basically, they have a lot of oil, and want to capitalize on that. Many big wigs of the international oil game were recently in Venezuela discussing potential to develop these reserves, and after they left the meeting, President Maduro said, “I want to tell investors from the US and around the world that Venezuela’s doors are open for oil investment.” This is big. Additionally, Maduro is expected to pass a law that would kill the state owned PDVSA’s existing monopoly over the oil industry. Even if the US does not lift its sanctions, we can only restrict trading under assets directly related to the government. If Total, Shell, or Equinor choose to begin operating on this land, there’s nothing we can do about it. That oil is free to sell, and Maduro will likely take a significant chunk of it. Now I hypothesize 3 scenarios regarding the US and Venezuela.
- The first is the least likely in my mind. It involves the US lifting sanctions so oil can be produced on foreign land making us look better environmentally. That aligns with many of the Biden administration’s goals, and there are likely going to be lucrative deals for any supermajors that want to replenish their reserves. I feel this would kick off a super major migration to Venezuela, and likely Suriname while they are at it. Hopefully this would limit domestic competition for the small and midcap operators, and everyone would be happy. Again, this is my least likely of the 3.
- I feel the most likely situation is where the US claims a humanitarian crisis. In the past, opening a country’s borders to international operators has not benefited the general public, especially in the case of corrupt governments. Take Equatorial Guinea, for example. President Teodoro Obiang has been the president since 1979, and has been notoriously corrupt for years. When the nation opened its borders to production, there was plenty of scandal going on and money floating to the top. It seemed that things actually got worse for the people of the country as the president and his family got richer and richer. His son used to keep his Ferrari in his multi million dollar mansion in Malibu, which really served as the base for his million dollar Michael Jackson memorabilia collection. The presidential family profited hard, and many American companies did too. Eventually, it prompted one of the largest evolutions in international corporate transparency, especially in the case of domestic American companies like Exxon who had been gifting rather large amounts of money to Teodoro. This is a great story that you can learn about in one of the chapters of Rachel Maddow’s “Blowout” which is a book that highlights some really intricate parts of oil and gas history. Again, I think it is incredibly likely the US will try to prevent Maduro from exploiting his people like we have seen historically.
- Lastly, the 3rd situation: nothing happens. Maduro opens the borders, but US sanctions remain, and super majors are in hot water for trying to get into Venezuela. It is entirely possible that the US will keep its own super majors from getting involved as we watch others produce far dirtier oil and make billions.
Whichever way it goes, this is certainly a story you will want to keep up with.
Lastly, I wanted to highlight something that I sort of saw as a win for the US energy portfolio. Last year, natural gas-fired plants supplied 1.6 billion megawatt hours of electricity making it number 1 in generation, which is pretty standard. Usually, second place goes to coal-fired electricity which generated 774 million megawatt hours last year. Well, the new second place winner is nuclear energy which generated 790 million megawatt hours! While this is great for nuclear, it shows a bleak future for coal. In 2019 energy consumption from renewables briefly surpassed coal for the first time in modern American history, but remember that consumption is entirely different from generation. Now this year, it has fallen in the ranks of power generation. Coal still plays a major role in energy generation, and I definitely think it has its place, but as far as hydrocarbons go, natural gas is the way. It is a fluid that can be transported by rail and pipeline. It has far fewer emissions per same unit of power generation, and is in slightly better standing with the government. Now, I’m not saying this is the death of coal, I’m just saying that perhaps now is the time to mark it as a reserve fuel. Rely on natural gas and nuclear for daily generation needs, but keep a coal plant around so that when a 30 year freeze comes in, you have enough supply to get everyone through safely and affordably. Hell, if you have a diesel plant doing the same thing, I see no problem! We have the resources and technology for energy to be plentiful and cheap, so let’s just be smart about it. Congrats to nuclear power generation for this big win, and hopefully we all navigate the energy transition with good intentions.
But of course that is the end of this episode. I hope you learned something! If you didn’t or have any other reason to complain, please please please contact me at email@example.com. If you were completely satisfied with the episode and it left you hungry for more, you can go to our website https://rarepetro.com to find dozens of pages and hours of content to read and listen to respectively. This is Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody.