Monday Madness: May 30 ’23

Posted: May 30, 2023

A continually worsening rig count, Scope 3 emission rules sure to make things worse, and the Iranian comeback.


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Audio Transcript

Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing another fresh episode of Monday Madness on May 30, 2023. Yes, technically this episode is coming out on Tuesday, but that is only because Memorial day was yesterday and I was lucky enough to have the day off grilling and spending good time with people I love. It was a nice relaxing weekend. Between getting a new cat with my girlfriend and the beautiful blooming flowers, my nose is as stuffed as a Thanksgiving Turkey. I love little animals, but the sinuses sure don’t so please excuse my nasally voice this episode. I hope you all got some nice time off as well and are well rested as we enter the week. If you are new to this segment, this is a space for a quick visit to some insightful statistics and a little bit of news that is making waves in the energy space. Let’s get down to brass tacks starting with WTI.

Last week it seemed like the price was starting to recover as it climbed from the $70 floor that was established. We saw a high on the better side of $74, but didn’t last long as it fell back to $72, but hey! That’s not so bad. I can deal with $72. Unfortunately markets this Tuesday morning did not fare as well and the prices plummeted down to a low $69. Only now has it recovered (if I can even call it recovery) to $69.78. I hope to get back to $70 before the end of the day, but it is better to keep emotions aside and let it ride. As you might expect, Brent has performed similarly with the same movement and volatility. The current spread is a little bit less than $4, but don’t go celebrating anything yet. The volatility aspect is one thing that often causes these spreads to oscillate wildly, so wait until it settles out for a proper read. That being said, volatility is only becoming increasingly more common in commodity pricing. The swings are frequent, but the spacing is tight. We haven’t swung much higher than $76ish dollars for a few months now and it never falls much lower than $70. If you check historical movement, we don’t really see anything like this since 2006 before it blew up in price following the 2008 financial crisis. Could be an absolute coincidence with zero valid correlation, but it does make the suppression of price look fishy, and yes I will call it suppression.

Next up is the rig count which has been – shall we say – less than ideal in recent weeks. After months of stable rig count we have fallen quite far from any signs of growth. So how did it fare this past week? Much more of the same. 9 fewer rigs for the week lowering the total to 711 or 16 fewer rigs than we had this time last year. It was actually the Haynesville that was the worst performing basin with 3 dropped rigs. The Cana Woodford dropped 2, and the Barnett and DJ-Niobrara followed with 1 lost each. Otherwise the Granite Wash, Eagleford, and Permian each added one so we are seeing a little strength added to the Texas side. From a state level, Oklahoma is now down 5 rigs. Utah and Louisiana are down 2, with Alaska and Colorado down 1. The only states to improve their rig count were Wyoming who is up one and Texas who is up 2, though that surprises nobody. The gulf of Mexico did not escape the slaughter and even fell one. We lost a bunch of horizontal rigs that were targeting a pretty equal split of oil and gas. I don’t have much to say here. Just goes to show that lots of companies are done spending on exploration as the price just didn’t pop when they expected.

The last statistic to cover of course is Thirsty Thursday written by Nick Fernhout (Thank ya Nick). You can always read it yourself on which I will always advocate for as it has many more figures to truly enhance your understanding. Here is the barebones for those of you who will only listen. Wow… What more is there to say. I mean a 12.5 million barrel draw is huge! The EIA sure didn’t expect it considering they forecasted a 1 million barrel draw. Almost equally as odd, the API reported a draw of only 6.8 million barrels, about half of what the EIA reported. They also forecasted a build. Something seems to be going on over at the API… The last time we saw a draw this large was not too too long ago just back at the end of November. However, prior to that there hasn’t been such a large draw since June of 2019. The draw in oil stocks was likely the result of much of the oil needing to be refined into products such as gasoline for the summer. As people drive, fly, and use other means of transportation the oil stocks across the country drop. Gasoline stocks tend to follow suit and gas prices have an inverse relationship, however, lag behind a few weeks. Gasoline cheapened nationwide this week, by a whole $0.002. Mississippi is charging on average $3.000 flat for a gallon while California is charging $4.826. Diesel cheapest too this week by $0.02 on average nationwide. Diesel stocks, or more accurately distillate stocks, continue dropping to very low lows. At this point, it’s getting worrisome. Propane and propylene on the other hand are sitting pretty above their 5-year range. Folks, that concludes Nick’s inventory report and brings us to the news. 

Our first story is big news in the regulatory space. The SEC proposed rules to “Enhance and Standardize Climate-Related Disclosures for Investors” because that is something that is apparently important to investors. They will do so by requiring companies to report Scope 3 emissions among many other things. Some of you may have forgotten how the scopes are defined, so here is a quick rundown. Pretend you own a pizza shop. Scope one emissions are those that are directly associated with the business, so this would apply to your small fleet of delivery cars. The gasoline that the delivery cars owned by the pizza shop would qualify as scope one. Scope 2 emissions come from what the company indirectly consumes as it produces a good. This would include the electricity the pizza shop uses to run the AC and lights. So far these are reasonable things to calculate as we do have data that can keep track of these. The last one is where it gets confusing. Scope 3 is every indirect carbon emissions associated with upstream and downstream activities. For your pizza shop, this would include the carbon cost of manufacturing t shirts that will be used as uniforms, the carbon associated with employees driving to your pizza shop, and many things that happen before dough is even delivered to the shop. Frustrated yet? Well let’s consider the downstream. What is the carbon cost of franchising your pizza chain to someone else? What is the carbon cost of someone throwing away a pizza box. What is the carbon cost of consuming the pizza?

Now this example is incredibly convoluted, yes, but you mom and pop pizza shop owners out there shouldn’t worry. These rules will likely be applied to massive corporations… but how? Even if we scale it up to Digiorno’s, how does the carbon cost vary if someone throws away the box vs washing out the grease and cheese to recycle it? Surely that varies. This is what companies are mostly upset about. There isn’t currently a universal methodology for supply-chain reporting, and disclosures couldn’t possibly be accurate. This would only serve to be misleading to investors. Besides, a large corporation like Digorno’s could probably stomach the cost of a carbon department to calculate such things. How is your local joint supposed to compete if held to the same standards? How could a farmer accurately calculate and associate the carbon cost of his food production, and would it be lower than an industrial farm? Carbon cost is only one metric to judge things off of, and it is incredibly arbitrary and far from accurate. As you can imagine, many people are angry, and I worry a lot for those of us in our industry.

Since you and I likely work in an industry dealing with raw energy commodities, the very thing we produce, by flawed definition, is the antithesis of green. I’m not saying that I don’t believe in the power of oil and gas, I’m saying that analyzing our industry through the lens of emissions (especially scope 3) would scare any investor away that was a climate alarmist. I suppose that is how we let it divide people, but I am incredibly worried about the SEC as they consider the finalization of this rule. Now this would be an easy tangent to get lost on, so keep that one locked in your mind and chew on it this week. Next we will target a more oil-centric story.

OPEC believes Iran would be a healthy contributor to the world’s oil market and welcome them back with open arms according to a recent statement made by OPEC’s Secretary General Haitham Al Ghais. What he means by that is the fact that Iran, one of OPEC’s founding members, is going to be a key player in trading and exports from the middle east once the sanctions are removed. Back in 2016, the Trump administration reimposed sanctions on Iran’s oil industry that aimed to cut off the head of their economy – that being oil and gas exports. The overall goal was to prevent Iran from continuing to funnel that money into their nuclear programs, and it kind of worked, but oil trade has done nothing but stop. China became Iran’s biggest purchaser, and even countries like Venezuela were receiving oil in exchange for planes full of gold. That’s only the stuff that is heard of. Iran definitely offloaded its oil between tankers, muddled some papers claiming its origin, and continued to push their product. Although the US will likely not stop Iran from developing nuclear technologies (whether that be for war or for energy), Iran will surely be repairing its relationship with Saudi Arabia and step up to the plate when they return to legal global oil trade – with or without the permission of the United States. 
Ladies and gentlemen that is all I’ve got! If you enjoyed the episode, please consider subscribing. We’ve got plenty of great content we are working on in many different forms of media, so you will want to take a peek at to see what else we have in the works. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!


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