Tavis is back explaining why we have hit 10 month price highs for most crude benchmarks. It is Monday Madness!
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on September 5th, 2023. This episode is coming out post Labor Day, so hopefully you enjoyed the long weekend. I had the time to pursue a little extra cooking so I whipped up some fish and chips that were pretty damn tasty along and some red beans and rice that a Louisiana native told me was very close to tasting authentic. What about you folks? Do you enjoy cooking in your free time? If so, go ahead and shoot us an email at podcast@rarepetro.com. I’ll give anything a shot and even give a quick little review in the next episode if anything ends up being shared. But you didn’t come here to listen to a culinary enthusiast brag about beans and rice, you came here to get all the most revealing statistics and biggest news stories in the energy space. Let’s get to it!
I have good news to start with. If you haven’t been keeping an eye out on commodity prices.. Boy are you in for a surprise. This time last week things were looking alright as we were enjoying some $81 oil. It is not triple digit prices, but it was a helluva lot better than anything in the 70s. Then we hit Thursday and Friday where we shot from $81 all the way up to $85 before we hit the weekend. That is massive news. If you are keeping score at home, you may realize that is the highest barrel price we have seen since November of last year! As if that wasn’t good enough – this morning the price shot towards $88 twice. At the moment of writing this script that price has fallen a little bit back to $87.42, but I imagine it is probably going to settle around $85 if we are lucky, though I can definitely see it falling much lower. So that is WTI, but what about Brent? Brent has successfully broken past $90 and sits at $90.47 at the moment. This is just above a $3.20 spread, but that is because commodities experienced such wild volatility and they are likely still finding balance, or prepping to drop right back down to the low $80s. Natural gas has just absolutely ignored the other commodities and dropped 20 cents in price over the same time period. It sounds bad but it is exactly where it has remained for the better part this year so at least $2.50 gas is… predictable? I guess… But still don’t let that distract from the excellent news we have this week with oil. Let’s try to keep the good news rolling.
Next up is the rig count. I actually have some good news this week! I suppose I should say good news relative to previous weeks. The rig count in the US has only fallen one rig week over week bringing our total down to 631 which is 129 fewer rigs than we had this time last year. This is a much better report than we have seen in recent weeks because usually we have been down 5 to 12 rigs, so this one ain’t too bad. Don’t get me wrong, I am not predicting that the trend is slowing. In order to claim that I think we would have to see a few weeks in a row where the rig count falls 1 or 2 rigs. Unfortunately I just think we are quite there yet. As far as data goes per major basins, the Cana Woodford and DJ Niobrara each added one rig to their total. The Arkoma Woodford, Marcellus, and Permian each lost one while the Eagle Ford took the biggest hit and dropped 2 rigs. It is far calmer from a state perspective as Colorado is the only state that was able to gain a rig while both Texas and West Virginia lost a rig. Surprisingly we are seeing one more rig in the Gulf too. Since there wasn’t a huge change to the rig count we don’t see a ton of emphasis on what kinds of rigs were being dropped, but I imagine the ones making horizontal hole are still losing favor the fastest. This is the smallest rig decrease we have seen since the start of June when we once again reported a 1 rig decrease. If you remember, we saw a 6 rig increase at the start of July, but that was the only positive rig count we have witnessed in 18 weeks. That’s right, the last positive rig count we had before July was all the way back in April. That means in 18 weeks we are down a total of 124 rigs. Ouch. At least this week it slowed to one, but I wouldn’t hold my breath and expect this to start going sideways anytime soon. I think we still have plenty of room to fall before we hit a floor.
Lastly we have our inventory report that we review weekly as our Thirst Thursday periodical. You can find it on our website www.rarepetro.com or I can get you some quick details if you missed it. Here goes: After an overwhelming month of drawdowns, the EIA was not shy in predicting another 3 and a quarter million barrel drawdown. Imagine their surprise when they ended up reporting another greater than 10 million barrel drawdown. The API also predicted and reported strikingly similar numbers to the EIA. The predicted a slightly smaller drawdown of just less than 3 million barrels (identical to the previous week’s prediction) but ended up reporting an even larger drawdown of close to 11.5 million barrels. As you might imagine, this looks incredible on a week over week change graph with a large emphasis of lines pulling down below zero 4 out of the 5 previous weeks. In 5 weeks the EIA’s numbers shown we have decreased domestic inventory levels by nearly 34 million barrels. On the cumulative graph we are dangerously close to establishing a trend that will break into new historical lows in the middle of September. It is likely trajectories will change as we were making small but significant builds to the inventory this time last year, but a lot of the data was artificially inflated by US SPR releases. Now that those have stopped, the market appears to be out of balance — at least in the sense of establishing a healthy base of domestic inventories. Gasoline inventories have decreased by only 200,000 barrels which essentially means they have remained stable. No major changes here, and that seems to bring some relief to the pricing. The average gasoline price in the US has decreased by about 1.2 cents per gallon from last week. Diesel, on the other hand, has come down by a little more than half a cent. Hey, a decrease is a decrease no matter how small. California has defended its championship belt of heavyweight gasoline prices as it averages $5.296 per gallon. Mississippi continues to celebrate the cheapest national average at $3.305. Let’s hope gasoline prices can remain on this downward trajectory so that all of our wallets can share a sigh of relief. Distillates are fighting hard and just might pull up before they crash into the boundary of the historical low, though we will see in about 4 weeks time. Propane exhibits a surprising and cool amount of stability as it maintains a steady trajectory and just barely tops historical normal territory as it’s about 16 million barrels above the medium of almost 80 million barrels for this time period.
So now we have reached the news potion of our podcast and I’m sure some of you likely have this question on your minds, “Why the hell are prices so high?” Well, if you hadn’t heard, there were some more production cuts. It was Saudi Arabia and Russia once again, and everyone kind of expected another extension of production cuts, but not quite to the extent announced. We’ve seen one month extensions a few times before, but this time they extended the cuts 3 months to the end of the year! According to an analyst from OANDA Forex, “It would appear they’re trying to double down and capitalize on the recent price moves. Put a big buffer in place for when the cuts end.” There are lots of barrels controlled by OPEC+, so this could do some crazy things for energy prices. It is predicted to leave us with a market deficit of 1.5 million barrels per day in the fourth quarter of 2023. Another notable thing is that the front month contract of Brent rose to a $4 premium compared to the 6 month contract in a structure known as “backwardation.” This doesn’t happen often, and is typically indicative of tightening supply of up front commodities. This could push us into the range of the 90s very easily, and potentially quite higher through winter. I doubt it will be a biblical shortage, but I would not be surprised if we busted triple digits come the start of next year. I guess the good news is that we deescalated our probability of a US recession within a year from 20% to 15%, but perhaps that goes right back up with the newly announced cut. The easiest way to hit us where it hurts is to reprice oil so that it is no longer traded in US dollars, but the next best thing is to get energy to be way more expensive than anticipated.
But ladies and gentlemen that is all we got for this episode today. If you are in dire need of additional energy content search back in the catalog of this podcast. Otherwise you can check out our YouTube channel under the very same name. Lots of interesting energy history topics there. Otherwise we have tons of stuff all over our website www.rarepetro.com from our favorite news sources to in house researched periodicals. There is certainly no shortage of content. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care everybody!