In this episode your host Tavis talks about a new futures contract, Venezuela’s attempt to trade crude for COVID vaccines, and the corporate world’s lack of funding for the environement.
Audio Transcript
Alrighty everyone welcome back! It’s me Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness. I hope you all had a great weekend! I spent mine up in Pagosa springs doing some skiing, and let me tell you, I am BURNT. I often neglect the importance of sunscreen, which is incredibly stupid to do on a bright sunny day with sparkling untouched snow as far as the eye can see. I normally just let a good burn happen early on in the spring to carry my pale self through summer but this time is way worse than before. Let me just say that I’m glad it is my brain and my voice that is my money maker, and not my face. But I know you didn’t come here to listen to the stories of a man scarred by solar energy, you can for the greatest news and statistics surrounding oil and gas. Let’s get started.
First up, WTI prices are doing A-OK. We aren’t back to the $65 range like we were two weeks ago, but things are holding steady around the high 50s and low 60s. At the time of writing this script, the price was at $60.39. The Suez canal fiasco is finally resolved, so business resumes as usual. It was fun while it lasted as it did push prices up around 3-4%, but overall had very minimal impacts on world supply. Had this lasted longer, I think we would have seen prices increase even more as 3.6 million barrels of oil per day were transported through that canal. That would have been over 3% of world daily demand before the pandemic. Fortunately, the Suez Canal “crisis” that could have taken weeks to resolve only took a few days thanks to a tiny excavator, a few tugboats, and rising weekend ties. I really don’t have a lot more to say about pricing. It seems that the upward trend since November is taking a break as we sit around the $60 range, but I’m confident that we will start another climb soon. There is one thing coming up that could prove to be a negative shock to prices, and that is another OPEC+ meeting at the end of the month. Production cuts were extended through March, but it seemed like Saudi Arabia especially was excited to lift these restrictions in April. Unfortunately, the US has experienced some build in their crude inventories, and prices are not any better than they were in February when production cuts were extended. If they repeal their production cuts, I would not at all be surprised if prices stumble a bit. On the other hand, if they extend production cuts, I doubt pricing would change very much. Just keep your eyes peeled for those headlines come April Fools Day.
Next up the rig count. We are up another 6 whole rigs! Of course, the Permian led with an addition of 5 rigs. But who is the “Second Place Stud of the Week?” Turns out that this week it will again go to the Cana-Woodford in Oklahoma who raised their total by 1 from 11 to 12 for a 9% increase. Congrats to them for such a strong performance lately. Something I have neglected to mention with the rig count lately is what type of rigs are going up. As RARE PETRO CEO Anthony McDaniels pointed out, the implications of a vertical well versus a horizontal well are very different, so I want to make sure that I am highlighting the changes in those counts as well. A majority of wells in North America are horizontal. Although they can be much more technically demanding and expensive than vertical wells, the benefit of tapping into a long thin horizontal play is reflected by their production profiles. Because of that, it should not surprise you that the vertical rig total has fallen from 25 to 22, and the horizontal total has increased from 372 to 380. Of course, each of these different types of wells has their own advantages, but horizontal wells are by far the most popular well to drill. Overall, a good week for drilling, and that brings us to an near 40 rig increase since the drilling moratorium was announced with the worst week only losing 1 rig.
Lastly, those inventories which have been incredibly unsatisfactory lately. Unfortunately, that trend seems to continue as the API most recently reported 3 million barrel build with the EIA following up with their report of a 2 million barrel build. This officially puts us on a straight month of builds totaling around 40 million barrels by the EIA’s numbers. To me, this is the number one factor keeping prices where they are at. Any geopolitical, financial, or technical perspectives are absolutely dwarfed by these supply and demand fundamentals. This leaves us in the upper quartile of the 5 year range, which is nothing to celebrate. If we look further down the supply chain, distillates stocked up just a bit still leaving them at a rather low level, but propane and gasoline went sideways, right before demand is looking to pick back up with warmer weather. I predict that gas inventories could get drawn upon pretty heavily any day now with spring break being the catalyst for increased demand. I predict that later this week, we just might see the slightest of draws with the warmer weather and canal blockage slowing things down a bit more. Unfortunately, I do not know what it is going to take to bring down these crude oil inventories.
I know things were a bit short from our weekly statistics, but I’ll do my best to make up for it by getting you some impactful stories within the industry. Our first story of course, has to be geopolitical and involves a brand new crude benchmark in the world market. Perhaps I shouldn’t say “brand new” as it is based on the existing UAE flagship product: Murban Crude. This actually went down the Monday this podcast was released, and by the time it became morning here, over 6 million barrels of oil were traded on this fresh futures contract, or 6300 lots. This is likely in response to China’s huge demand for oil, as the west attempts to phase out fossil fuels. If the UAE can successfully promote this contract in the long term, it will certainly solidify themselves as a significant international player, and I have full confidence that they can pull it off. But this affects more than just the UAE. It completely challenges OPEC’s control over price influence. Think of it this way, with the UAE letting the market regulate pricing, rather than the cartel who can choose how much they collectively want to produce and sell, OPEC has less control over an entire country of production. What if Iraq wants to do it too? Or Iran? That will just continue to dilute the amount of control the cartel has on the world. Fortunately, there are a myriad of people interested in getting their hands on this low viscosity, low sulfur content crude, further proving that it could be a viable future contract. Sure makes me wonder, where will this go? Will this inspire other countries to follow? If so, when will OPEC be disbanded? Will it ever be disbanded? I’m a big fan of the global free market, and I tell you what, things seem like they may be trending in a great direction. Thanks to Scott McNear at RARE PETRO for sending this article my way.
Next up, I’d like to once more go to Venezuela. One of the hottest topics today of course, is vaccines. How does a broken country like Venezuela afford vaccines for those who want them? Simple really. Pay with crude. Like we mentioned last week, Venezuela is finally looking to allow foreign investment into the country for oil development to capitalize on their massive reserves. This is just another way they plan to take advantage of the oil they are swimming in. Maduro said, “We are ready and prepared for oil vaccines, but we will not beg anyone.” So far, the few vaccines that the country does have are being produced in Russia and they agreed to purchase them back in December. Unfortunately, they can’t afford much more, so that is where the “Oil for Vaccines” plan comes into play. Fortunately, the country has also approved the Sinopharm vaccine from China. If anybody trades the vaccines for oil, I would not be surprised if China took them up on it. First of all, these two countries are in kahoots. Second, China could damn near name any price, and I’m pretty sure Maduro would pay it. After all, there is no official exchange rate of vials of vaccines to barrels of oil. What if we looked at the dollar? Well, the Pfizer vaccine costs about $20 per dose privately, and the Moderna vaccine costs about $15. Let’s keep things simple and assume the Sinopharm vaccine also costs about $15. At $60 per barrel of oil, you are only getting about 4 vaccines in the exchange. Let’s say Maduro wants to get enough to give 80% of the population a single shot of the Sinopharm. The population of Venezuela is about 29 million people. Using this weird conversion rate we have set up China would want 7 and a quarter million barrels in exchange. This doesn’t sound too ridiculous, and if China has a huge surplus of their vaccine, I would expect that they would use it to get as much oil as they possibly could.
Lastly I wanted to cover a survey relating to ESG. If you don’t know what that stands for, it is an acronym for environmental social governance, and it is the talk of the town for anyone in the energy industry. It is the thing that is fueling all of these companies to set carbon or emission based goals all anywhere from 2025 to 2050. In short, it aims to promote more responsible resource extraction and use for any corporation. A survey was recently conducted under the name “Zeronomics” and received 250 respondents who were all at the senior executive level or large shareholders in a company. 64% of those surveyed felt that an attempt to transition to net-zero emissions was uneconomic. The biggest reason? A lack of sufficient financing. 85% of the respondents said that they would need medium to high levels of investment. If you were categorized as a heavy polluter, this rises to the range of 91%. This is alarming to me. It’s not that these senior level employees and big investors are technically unable to do it, it is just far too expensive of a technology or process change to be feasible. I think this sums up how a lot of people feel about the whole thing. Sure, if we can make the environment a better place, we would love to do it, but unfortunately, a lot of these things have costs. If the corporation can’t pay, should they go under? What is considered someone’s best effort to survive? This survey stirred up so many questions for me, which is unfortunate because I went in looking for answers. Hopefully energy companies aren’t overextending themselves. Have we forgotten what happens when you buy things on credit? When you borrow money for more wells and your only justification is the first 30 days of the initial production rate? I don’t like it when billions of dollars get wrapped up in projects like this and no one can pay it back because it affects me not as a petroleum engineer, but as a consumer of all of these products. Perhaps this will just be a long term culling of people who simply don’t have the money to be environmentally conscious enough. I worry that we won’t be careful enough, and that will be the number one justification for an industry existing. If that was the case, we sure wouldn’t produce as much oil as we do, but the cost of that would be… well… they cost energy. I have high hopes for this energy transition, but it certainly seems treacherous terrain to navigate.
Sorry to end things on an opinion centered around a survey. Those of us who work for RARE PETRO really just like giving everyone something to think about so that you can reach your own conclusions. We just try to arrange all of the information in a way that looks good for you. But, if you are looking for more content be sure to go to https://rarepetro.com/ for more research and information. While you are there, check out the useful links page! It’s a new page which features a collection of our favorite data resources so that you can start getting your hands dirty with some of the data that we look at everyday. Rig counts, oil prices, gas prices, drilling productivity, high level reports, you name it! Our website is a big data and research playground, so go ahead and get lost in it. This has been Tavis Kilian with RARE PETRO and until I see you next time, take care everybody.