A rally in prices, Germany stepping in line, and refusing to pay full price for gas.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian bringing you another thrilling episode of Monday Madness on May 16th, 2022. The weather is getting warm, and perhaps it is doing so a bit too early. Texas was dealing with a strained grid just last weekend, but you won’t hear me talk about it here. I covered this topic with Anthony on the newest episode of the Wacky World of Energy which will be coming out later this Wednesday, so be sure to frac that follow button on whatever platform you listen to us through so you don’t miss some of the freshest energy discussions on the internet. But you didn’t come here to listen to me cold open with personal promo. You came to learn about interesting statistics and revealing news stories within the world of energy. Let’s do it.
We of course start off with commodity prices. After a rough week for markets, commodities are in need of a little love this week. After falling below $100 on Tuesday evening, WTI prices started to begin a solid climb back towards $110 which it reached by Friday. Now it is already up another $3 to $113.35, but keep in mind that our Monday mornings are known for being incredibly volatile. There is something about coming off the weekend that just makes these commodities whip back and forth. It’s good to see WTI doing well, but I’m even more excited to see the recovery in natural gas pricing. Last week it fell to $6.50 by Monday evening. Fortunately, it ended upcouncing and made steady gains all week. This morning it opened up and topped out above $8 but has since come back down to settle at $7.785. I don’t see a lot of significant news driving these commodities either way, just the general headlines that allude to commodity shortages. I’d expect these to go up even further as we get into the warmer months of summer.
Next up is the rig count. If you remember last week’s episode you’d know that we finally broke through 700 total rigs once again. That apparently stoked the fire as we are now up another 9 rigs to bring the total to 714 in the US which is 261 more rigs than we had this time last year. At a basin level it seems that the major basins are only seeing a little bit of the action. The Cana Woodford saw the biggest change at 2 more rigs. The Arkoma Woodford, Eagle Ford, and Williston tacked on one rig each while the Ardmore Woodford, Granite Wash, and Mississippian each lost one. State by state reveals Oklahoma as the big dof as they tacked on 4 new rigs bringing the state total to 57. Otherwise the other major states you’d expect added a rig here and there. The only state to lose a rig was Kansas who apparently had one rig running before this report came out. Color me surprised! I didn’t know anything serious was going on there. Otherwise the Gulf of Mexico saw a one rig increase as well. This is the best type of growth to witness. It is spread across the US and steady. Not any one rig count is running up more aggressively than it should, other than maybe the Permian, but I don’t anticipate they will run into any serious issues. These rigs will be targeting more oil than gas and making either directional or horizontal hole.
Lastly we visit the inventory data to round out our statistics. I know you hear me say it every week, but seriously! Go to www.rarepetro.com to read this inventory report. It is waaaay better to read it and all the associated materials rather than listen to me hit the high points. Not only that, but it will really enhance your understanding of commodities, especially in the domestic context. Alright alright, I’m off the soapbox. Here’s the deets. The EIA expected a meager half million barrel drawdown, but were actually off by about nine million barrels. The resulting build was closer to 8.5 million barrels. The API somehow made the exact same prediction, but the reported build was much smaller at 1.6 million barrels. Strange how they both arrived at the same prediction, no? This is the second build in just five weeks over 7.5 million barrels. Fortunately, the last one before that was back in October, so hopefully these large builds don’t become the norm. While no one loves to see a significant inventory build, it is probably for the best as we are now much closer to being back in the historical 5-year range, which is good considering we are tight on just about every commodity at the moment. While builds don’t benefit energy prices, they do combat inflation which everyone can appreciate right about now. Folks we have been touting on it for a long time, but gasoline inventories are once again lower than the 5-year average. According to the EIA, gasoline inventories fell 3.6 million barrels which is one of (if not the) steepest drawdown of this year. This comes right before a season of anticipated builds meaning the problem could quickly exacerbate itself if not addressed soon. Combine this huge draw with continued inflation concerns and you have a recipe for record breaking gasoline prices. They are now nearly $1.50 higher than they were just a year ago. Propane inventories are doing just fine. Distillates are just getting worse. Diesel, maritime fuels, and other derivatives are quickly increasing in price all over the world. Right about now is when we expect to level out before building out inventories now, but we are in the very early stages of a concerning shortage. Already we are 23% below the average which is certainly significant. Fortunately, we are witnessing a strong economic rebound from COVID as demand for distillates return. This is because transportation, construction, and industrial manufacturing are getting back into the swing of things. Unfortunately the consumption is outpacing demand and has been since about September of 2020. The trendline is steep and pointing in a downward direction which greatly contrasts the mostly horizontal 5-year historical range. I anticipate this will remain a silent issue until we get closer to the winter of this year. By that point it will likely be too late to fix.
But that concludes our statistics. I’d like to next talk about the gas for rubles scheme that Russia set up. Now we’ve got someone else on board: RWE, or for the rest of you non-German folks like myself, the largest producer of power in Germany. They are getting in line with many other European buyers who are opening accounts to pay for Russian gas in Euros before it is eventually converted to Rubles. This is the special process that the EU has agreed on in order to not violate sanctions while still appeasing Russia. I know, its a mess, but the important part of all of this hullabaloo is that Europe is bending to Russia’s will in order to secure the energy resources that they need. So while the world cries and shakes its fist telling Russia that it is bad, they simultaneously hand them fat wads of cash for their energy. This all sounds like some kind of bad joke, but it is in fact the world we live in.
Next, we’ve got a leaked report from the EU as they get ready to release their plans for full scale gas supply shortages. As the leaked memo says, “A different set of measures may become worth considering in the event of a sudden large scale or even full disruption of the supplies of Russian gas leading to unbearably high gas prices and inadequate supply of gas.” What are these potential measures? One of which is price caps. This would be done to give consumers a little bit of breathing room amidst the inflationary pressures we are observing with each passing month. As many experts were wise to call out, this is a terrible idea. One EU official said, “Short-term price interventions could remove the interest of market participants to hedge against the risk of high prices in the future.” This would lead to lower storage injection and essentially serve as a solution that really kicks the can down the road. Others are even arguing that we need a cartel. No, not one like OPEC, but a buyer’s cartel. A German EU official said, “The price of gas will fall if G7 only buys gas for a low price. For this, we need courage and creativity and must not simply surrender to the absurdly high gas prices.” This again would be another bad solution in my eyes. OPEC would just be forced that much closer to an alliance with Russia and China where they can freely trade as they see fit. Unfortunately, there seems to be only one good solution. Rip off the bandaid. What do I mean by that? Let the free market do the talking. Let domestic energy be produced to help the rest of the world. Let folks put more holes in the bed of the North Sea. Letting the free market react to commodity pricing and supply and demand issues will surely hurt in the long term, but if we batten down the hatches and weather the storm, I think we could come out on the other side with a lot of new insight and an abundance of energy. While this is unlikely to happen (and certainly not guaranteed to work), I do think it has a better chance of succeeding rather than coming up with “solutions” that serve as a bigger band aid than the last.
The whole world is starting to realize it. We love energy, and after a series of strange and unfortunate events, we find ourselves almost returned to consumption comparable to pre-pandemic times. The difference is that we don’t have the same supply as 2019, and that is posing to be a potentially expensive and grave issue for more and more countries.
But ladies and gentlemen! I need to reign it back in. This is the RARE PETRO podcast. Not “The End is Nigh” podcast. This doesn’t mean that we are headed back to the dark ages, but it does mean we will encounter some interesting energy issues through at least 2025. The best thing you can do is keep your eyes open, an ear the tracks, and your brain active. Fortunately you can do all of those things by following this podcast. You can find plenty of other content on our website, www.rarepetro.com should you get bored before we release another piece of content (which is nearly daily). This has been Tavis Kilian with RARE PETRO and until we see you next time, take care everybody.