Monday Madness: May 2 ’22

Posted: May 2, 2022

Crazy commodities, Russia maintaining the energy high ground, and a bottleneck of gas in the US.

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Audio Transcript

Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another thrilling episode of Monday Madness on May 2, 2022. That’s right, it’s May and there were not many April showers to bring May flowers. As a matter of fact, it just might snow today which blows my mind considering I’m still sunburnt from yesterday’s golf outing. Now, I know you didn’t come here to listen to me make small talk about the weather. You came here to get the lowdown on the biggest statistics and news stories within the world of energy. Who am I to get in the way of that?

We’ll kick it off with commodity prices. I’m writing this script very early in the day, and WTI hasn’t had the chance to move too much. It’s sitting at $101.50 right now, which is about where it spent most of its time last week. Sure it climbed up from lower than $100 to $105, but resistance keeps pushing that price back to the $100 point. I expect this is where the price will live for some time until something dramatic happens in Europe. We’ve seen some wild roller coaster movement in the past few months, but I think the longer this gets dragged out, the less attentive the world becomes and the less serious it all gets taken. Natural gas on the other hand is getting more expensive once again. You’ll remember that we saw a runup to $8 a couple weeks back before it cooled off and fell back down to $6. Right now natural gas is about $7.50 and has had quite a big past few days of movement. It has been as low as $6.75, but the news of Russia stopping its delivery of gas to Poland and Bulgaria is definitely putting some upward pressure on the price. Not only that, but I’d like to look at an additional commodity today: heating oil. About a month ago it was priced at $3.25. Very briefly last week it ran all the way up to almost $6 before settling back down at $4.00. I bring this up just to highlight how volatile commodities have been as of late. Sure this isn’t a big trading heavy hitter headline grabbing commodity, but between this and the other small guys like distillates, supplies are tight and prices are sensitive. Keep an eye out folks, because things could get wild quickly.

Next up is the rig count. The US rig count is up 3 on the week bringing the total to 698 which is 258 more rigs than we had this time last year. Crazy to think by this time next week we might be back over 700 rigs. We haven’t seen numbers like that since March of 2020, just a few weeks before the infamous price crash. The rig count is definitely slowing down because we are not seeing companies produce freely yet. They are exercising capital discipline and sticking to paying down debt to please their stakeholders. While the rig count goes up, the DUC count keeps falling. The Permian and the Williston each gained a rig. The Cana Woodford lost one. This somehow leaves Texas and Utah down a rig each with Louisiana and New Mexico up 2. Not sure how those numbers shake out, so folks must be producing from some mid to small tier reserves that are outside of our big favorites. The few new rigs will be drilling horizontal hole and targeting oil. Even the Gulf was able to secure an additional offshore rig this week. Good numbers all around, and I hope we see steady growth like this for weeks to come.

Lastly is the inventory report that was posted last Thursday on www.rarepetro.com. Lots of important data and charts that we went through last week, but here’s what you missed in case you didn’t have the pleasure to read it yourself: Although the last drawdown was nearly over 8 million barrels, the EIA has relaxed its expectations to predict a 2 million barrel build. According to the actual results, the build was truly closer to 692,000 barrels. The API predicted a slightly larger build, but reported a build of nearly 5 million barrels. It is weeks like this that make us wonder where the EIA and API source their data from. Lockdowns in China are back in full force which is taking a decent amount of hydrocarbon demand off the table. Methods of keeping folks in their homes include fences around entryways, steel wire across the outside of the front door, or simply a metal stake placed at the bottom corner of the door and buried deep into cement. Whether or not the people want to be locked down, the government is making sure it will happen. Despite the small build, the general trend of events shows that inventories are decreasing, or best case scenario, leveling out. As soon as demand returns, to pre-pandemic levels, you can expect these totals to continue to fall. Gasoline inventories decreased by a steep 1.6 million barrels last week. While inventories have been dropping, it is to be expected for this time of year. We should expect to level out in the next few weeks before trending even further down during the summer months. While gas is technically lower in price than it was a month ago, that is a result of a massive amount of emergency reserve releases, and it still hasn’t pushed prices down that far. A month ago gas was averaging $4.246 a gallon. Now it is $4.141 which is a mere 10 cent difference. Hopefully, we make the same shape on the following chart as we did in 2010 because this is getting pretty crazy pretty quick. Distillates are holding the right slope for this time of year but are already much lower in supply than they should be. If distillates don’t level out over the next two months, lots of folks are going to be struggling to find cheap heating oil amongst other products. Propane is doing A-OK and may actually be in the beginnings of building some extra inventory. Good for you, propane.

But that wraps up our statistics which, might I add, are looking mighty fine. Next a quick update to the Russian and Ukrainian conflict. I know, I know, it gets to be pretty mundane and run of the mill after months of talking about it, but we try to bring the most important information to the table. The European Union is apparently very serious about stopping the consumption of Russian Energy as soon as possible, and may have an agreement as soon as this month if not this week. Countries like Germany were fans of a phase-out model over several years, but it seems the timeline has been accelerated to a matter of months. More and more folks seem to be on board with this idea which is important because the decision needs to be unanimous to be official. So at this point Russia either

  1. Dismantles the EU
  2. Continues to receive oil and gas revenues

In a worst-case-scenario turn of events, I can see the EU somehow banning Russian energy and Putin replying by halting or reversing all pipeline flows. They would be simply playing by the rules established by the EU and damaging them at the same time. This has got to be one of the craziest stories in energy that we have seen since the Gulf war or even the embargo of the 70s. I don’t want to beat a dead horse anymore, but Russia is in a healthy position, and the outcome is looking more and more grim with each coming day.

In domestic news, the US’s gas production has slowed at a time when you would least expect it. This is not a function of folks getting lazy, but mostly bottlenecking from a pipeline perspective. Pipelines in the Permian are filling up quickly according to Reuters. This could push natural gas prices even higher if gas is waiting to be delivered and pipelines have nowhere to place it. I’m not in the business of LNG or storage, but even I know someone could make a killing addressing this issue. I would bet that it is more of an issue with permitting and federal compliance at this point. There’s a whole lot of red tape surrounding pipeline construction in the United States, largely because of the attitude around domestic energy. The fact that our current head of administration killed the Keystone XL doesn’t really afford you a lot of confidence either. As we’ve said before, it may get to the point where domestic energy is ridiculously expensive despite all of this booming gas production in regions like Texas. It won’t be an issue of supply and demand so much as storage and capacity to deliver the stuff. The sooner we invest in energy independence, the sooner this situation remedies itself.

Sorry it has been a slow week for news folks. At the end of the day, Russia has the whole world watching the game it is playing against the EU, and we are all on the edge of our seats waiting to see what happens. Domestic policies are short-sighted and ignorant, causing problems here, but it is difficult to complain when other countries are getting invaded or losing access to energy altogether. If you want more information regarding just about any topic in energy, go to www.rarepetro.com in order to find a gargantuan vault of podcasts, videos, and written research. We’ve covered lots, so I guarantee you will find a topic that interests you. Other than that we are always open to your feedback, opinions, or disagreements. You can send all of that over to podcast@rarepetro.com. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!

Music: https://www.bensound.com/royalty-free-music

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