In this episode Tavis discusses tantalizing commodity details and how the world of seaborne trade is changing.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you a new episode of Monday Madness on March 3, 2023. This is the first episode of March, and I just can’t quite believe it. Seems not that long ago we were stepping into the new year, but already we are staring down the barrel of Q2. How have you spent the year so far? Have you used your time wisely? Have you learned a lot? If not, consider subscribing to the RARE PETRO Podcast, or just give our website a quick look. Our Nick-terns are working hard to churn out some excellent content between their studies, I’m always making weekly appearances over the air, and Anthony helped wrap up the newest spicy dialogue in the Wacky World of Energy. It is a great way to stay up to date on energy news and any groundbreaking developments in the space. Go ahead and frac this follow button and drop RARE PETRO into your favorite search browser to get started. But that’s enough self plugging. I think it is about time we get into the meat and potatoes of this podcast, and we will get it started with commodity prices.
Surprisingly, WTI is on the top side of $80, but I don’t think that will be true for very much longer. It opened this morning at $79, took a brief little dollar dip and spiked up to $80.33. It’s been slowly deflating since, and I believe back to $78 to $79 by the end of day. That is not to say that the price action has not been interesting. Last week we started at $76 and worked steadily up to $78 by the end of Friday before there was a brief jump to almost $80. In recent weeks we have usually seen this followed by a massive decline on Monday morning. I know it is still early, but go ahead and keep an eye on that WTI price by the close of the day because we might be very close to bursting through this ceiling. Brent maintains almost identical price action. I say almost identical because it sits in the high $85 range. For those astute listeners out there, you may recognize that this means the spread between WTI and Brent has narrowed from 7 to 5 and a half dollars. This may not sound like much, but we have consistently had 6 and a half to 7 dollar spreads so far this year. Pairing this with what we know about WTI’s movement leads me to believe technical factors in the supply-demand market may finally be coming into play. This could be the most interesting oil price week we have witnessed so far this year. Fingers crossed! Oh! I almost forgot. Natural gas prices are exhibiting the same volatility we have come to know and love. Last week it climbed a bit before spiking on Friday afternoon to tickle the $3 point before crashing right back down. It has since been trending downward and currently sits at $2.573. Not too much crazy going on here as most folks believe natural gas will likely sit here for the next 3 seasons, but I personally believe commodity markets are so tight that increased export capacity could dramatically shift normal territory.
Next of course is the rig count. As you may have predicted, we continue to decline as the US total falls 4 to 749. This is only 99 more rigs than we had this time last year, and the first time we have seen a double digit year over year number since the explosion of added rigs that came after the fall of 2020. Not only is that under 100, but we have shown a steady multi month plateau insinuating that a boom of rigs is nowhere near. The Permian took the brunt of the blow at a basin level with a 4 rig decrease. Otherwise the Mississippian and Haynesville also lost one. It is not all bad news because the Cana Woodford was able to add 1. State by state Wyoming bears the only positive number with 2 new rigs. Oklahoma lost 1, Louisiana 2, and Texas 4. To add a little salt in the wound we also have the Gulf of Mexico underperforming with a lost rig. The emphasis of rig change is switching from oil to gas wells. Certainly not the best report we have visited this year, but also not the worst. It seems like the sweet spot for rigs right now is between 730 – 760 rigs.
Lastly of course is Nick Fernhout’s excellent inventory report. He pulls some incredible data and visual resources and posts them weekly to rarepetro.com. If you missed last week’s cocktail and data, here it is condensed as much as I can: The EIA’s conservative forecast was just under half a million barrels while they reported an actual value of 1.165 million barrels. Not nearly the 8 or so million I had in mind last week. The API forecasted a similar number, however, reported a much larger actual build of over 6 million barrels! I’m not exactly sure what the reason is behind the discrepancy this week but most people tend to lean toward the EIA for accuracy. It seems there is somewhat of a pattern; small build, small build, very large build, medium build, small build, repeat. If the pattern holds another week we may see a 4-5 million barrel build. Gasoline stocks drop for a consecutive week as gasoline prices edge lower. We have lots of oil here in the US as evidenced by the 10 straight weeks of builds, it’s just a question of whether or not that crude oil can be refined at a reasonable rate. Gas has become 2 cents cheaper this week, yay. There is a nearly $2 spread between gasoline in Hawaii/Alaska/California and Texas/Missouri/Mississippi. In the next few weeks we may begin to see a slight increase in gas prices as the summer blend is rolled out across the country, which is more expensive than the winter blend. Diesel dropped 7 cents this week while diesel stock rose ever so slightly. Propane/propylene stocks are just riding the wave. A new section of the report, Nick thought some insight into the US’s oil imports and exports would be good to cover, so here is a first take at presenting that data to you. First the big picture. Zooming in on just this week; while net crude imports/exports are positive, other petroleum products exports heavily outweigh imports this week, bringing the net imports/exports into negative territory. Most of the exports were destined for Mexico, Canada, and the Netherlands. The most imports were from Canada, Mexico, and Saudi Arabia with the lion’s share coming from Canada.
Thanks again Nick for another great inventory report. I for one am excited that he is also looking at import export data. That should be a fun one to watch through the coming months.
Our story for today actually comes from Anthony McDaniels. He shared this article with the group that analyzes how the Russian-Ukraine conflict has altered trade patterns for seaborne crude. As you know, Europe decided it would be consuming as little Russian oil as possible. This has led to increased export demand from the US. Before the war these would be transported over the pond by Aframaxes with a capacity of 750,000 bbls and Suezmaxes with a capacity of one million barrels. Exports to Asia were sent aboard supertankers (technically known as VLCCs) with a capacity of 2 million barrels. With so much demand now being directed towards Europe, the incentive structure is starting to become challenged. According to ship brokerage data, there are around 108 VLCCs trading west of Suez with more arriving everyday. This leads to the Atlantic crude tanker market becoming increasingly competitive. It is possible that we could soon see a record number of VLCCs transporting crude from the US to Europe. I don’t know about you, but nothing about that situation seems to scream “healthy fundamentals” to me.
For those of you concerned with the smaller Aframax and Suezmax ships… don’t be. This peculiar structure has benefited the smaller ships as well. In a situation where you may have had several Aframaxes transporting oil to a destination, you may now only have 2 VLCCs carrying the load the bulk of the way and offloading onto smaller Aframaxes and Suezmaxes. It costs around $60k per day to operate a VLCC, and because of new supply and influences, $66k to operate a Suezmax. That is a 10% larger cost to operate a ship with half the carrying capacity. All of those VLCCs we just mentioned are now competing for business with the smaller ships because they are just too damn big to get oil into ports, so the Aframaxes and Suezmaxes complete the last legs of the journey. This has effectively transformed VLCCs into high demand shuttles, only 2 years after they were used for cheap offshore storage.
Some VLCC owners expressed disappointment in the lack of increased activity between the US and China. As US crude exports climb, long-haul exports to China do anything but. US shipments to China have averaged around the same amount from 2021 to present suggesting that even though the US is pushing more resources out to the world, Russia is doing an excellent job of servicing China’s hydrocarbon demand. It doesn’t take a rocket scientist to figure that one out as Russia is far closer and friendlier with China than the US could ever dream of being. Unfortunately, we will not be certain of how much more oil China is consuming from Russia because lot’s of it is transported by private companies that operate outside of Western markets.
Although VLCC’s, suezmaxes, and aframaxes can all find reason to complain, they are just getting greedy because they are making 10 times more in Q4 of 2022 than they were a year prior. These are the best earrings for many oil shipping companies since the 2008 financial crisis. Demand for all ships is high, and you had best remember that is the case because demand for imported oil makes it so.
Folks, that is all we have for today’s podcast! I hope you had a good time. If you are hungry for more, go check out www.rarepetro.com like I had mentioned before. If it’s not our content, we have pages that direct you to some of our favorite data and agencies that put out a lot of the information that we consume in our own time. It’s a great day to learn a little more, and we hope you choose to do it with us. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care everybody!