Failure to meet the quota, high prices, border skirmishes, and Shell’s decision to leave
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian bringing you another fantastic episode of Monday Madness. I recently watched “Pan’s Labyrinth.” When asked if I had seen it before I told them, “Oh yeah! I remember watching that movie when I was a little kid. Great costumes and a really fun story. I’d love to watch it again.” Unbeknownst to me, I was not talking about the same movie. I was thinking about the one with David Bowie which was whimsical and kid-friendly. Turns out Guillermo Del Toro directed a much different version focused on abuse, civil war, and evil. A very different movie, but still one to enjoy! I was just shocked watching this one as I did not expect to see any of what was presented. But enough of that, you didn’t come here to listen to a young engineer review films (that’s just not what this podcast is all about), but you came to hear about the biggest news and statistics in the world of energy. Let’s get into it!
First, of course, commodity pricing. At the time of writing this script, WTI pricing is $79.79. It peaked at about $85 flat last Wednesday and fell to almost $80 flat on Friday. Now, this news may not be stellar, but I’m seeing the beginnings of a pattern. Go ahead and try this activity for yourself too. Find a chart for WTI oil price and set the time frame to the past year. Back in March, it peaked at $65 before quickly falling to $60. From there it climbed to $75 without much resistance until mid-July. Then it dipped once again to about $62 before climbing to $80 by the end of October. If this is a pattern, we can expect the volatility to increase, but we can also expect the price to dip to as low as $70 before once again making a steady march to maybe $90-$95. Again, just pure speculation from chart geometry, but we will see how this prediction pans out. Perhaps I should put my money where my mouth is and find a way to play it. Natural gas has also fallen in value. Last week it was about $5.40 but now sits in the territory of $4.80. Unfortunately, I do not see the same pattern applying here, but natural gas is also the fuel of choice for winter, so it has that going for it. Keep an eye on WTI especially in the next 2 weeks because I expect big swings in either direction.
Next, the rig count. Another good week with a 6 rig increase. This brings the US to a total of 556 which is 244 more rigs than we had one year ago today. While it seems amazing to have this much activity, it is still strange to compare it to the 1000+ rig counts witnessed back in 2018. Still! Don’t want to complain when the rig count is this nice. Looking at it basin by basin, the Ardmore Woodford took a beating. It lost its only two rigs. Every other basin fared much better. The Cana Woodford and Utica were the top dogs with 2 new rigs. Otherwise the Barnett, Eagle Ford, and Permian were able to add one each. No other major changes occurred. What does this mean state by state? Well, Texas put up 10, yes that’s 10 rigs. I can’t think of a time where we saw another week over week change this significantly. Double digits are definitely something to celebrate, so congratulations to Texas. The next best was Ohio with 2 and Louisiana with 1. West Virginia lost 1 and new Mexico lost 5. Yeah. 5. The Permian is doing awesome, but only from the Texas end of things. An incredibly volatile week, but still found a way to add a good deal of rigs. Let’s try to keep a closer eye on this one for the next week or so.
Our last statistic is best enjoyed with a nice stiff drink and RARE PETRO’s weekly Thirsty Thursday report released on, you guessed it, Thursday. Check it out on www.RAREPETRO.com. If you missed it: The EIA predicted a 2 million barrel build in its most recent report. We did witness a build, but it was surprisingly small at just one million barrels. This is about half the magnitude we’ve seen in builds of recent weeks. The API also predicted a roughly 2 million barrel build but reported wildly different results. The actual drawdown was nearly 2 and a half million barrels. Builds have been the trend of recent weeks, but the past 3 week’s builds have been decreasing in magnitude. Still, the president has made it known that there are strategies to deal with the upcoming energy crisis, so hopefully, prices for these commodities don’t become too unreasonable for the American public. The gasoline section of the EIA’s inventory report has yet to announce its results with respect to gasoline, but know that the trend is likely to continue downwards. If not this week, the next two are almost guaranteed as people travel for Thanksgiving. Gasoline prices however are continuing to level out. With a slight change of 2 tenths of a cent, they have pretty much held steady. Is this the new market rate? Will supply and demand dictate that prices remain here? Only time will tell. Gasoline is still the cheapest in Oklahoma at $3.03 a gallon and most expensive in California at $4.65 a gallon. With global demand continuing to outstrip global supplies, it could be months before we see prices come down. Distillates and propane are not poised to do anything significant soon. These categories will likely continue to hug their lower limits.
But that. Is. it. Next, our news stories start with OPEC falling short on production and gas prices. Each month, they planned to increase monthly production by about 400,000 bbl per day. So far it had been going okay, but production only went up about 217,000 barrels in October. Now there are 2 possible reasons for this. The first, and least likely, is that countries are continuing to suppress production in order to drive the price even higher. Yes, this is possible, but after 2020, a lot of these countries are producing as much as they can to make up for the losses they sustained. The more likely scenario is that 2020 left these systems damaged whether that is a change in conditions that stopped up wells, a decrease in available labor, or lack of governmental support. The capacity that was originally anticipated just. Isn’t. There. Saudi Arabia is doing very well at producing at quota, but lots of African members are really struggling to pick up the pace. Nigeria, for example, is struggling with events of civil unrest that make sit that much more difficult for operators to produce. Lots of Americans are now looking at our own country. We have incredibly high gasoline prices right now, and Biden said he had some strategies for bringing down the price. So… what is he going to do? After all, this is a global issue, so there is only so much he can do to decrease the price domestically. At present, there are 3 options that are most likely. The least likely of the 3 includes an export ban. This would greatly disturb global markets, tank WTI prices, and raise the price of foreign oil that is still necessary for refining gasoline. This, in my opinion, is the absolute worst option. But, remember, the Biden administration has made it very clear they are serious about pursuing climate policy reform. If they really wanted to stick it to the supermajors, this would be an exceptional way to do it while simultaneously (albeit temporarily) alleviating the price of energy. Eventually, oil would become so scarce that prices would go right back up. The second option includes relaxing biofuel standards. This means that rather than requiring refineries to produce x amount of fuel with y amount of ethanol mixed in, refineries are given free rein to process as much gasoline as they like with no limits. This might be a good way to absolutely crush some of our oil inventories while simultaneously producing large quantities of fuel. Still, it would make crude more expensive if refining capacity is increased and also tank the price of grain commodities, especially corn. The last, and most likely option, includes dipping into the SPR. Even though this crude is likely too sour to be efficiently refined, it would bring a lot of oil to the table and temporarily decrease the price of gasoline until A) the oil in the SPR runs out, or B) the existing issues of demand outpacing supply continues to push prices upwards. At the end of the day, I’m glad I’m not the president. All of these solutions make it seem like you are damned if you do and damned if you don’t. It’s not like Biden is going to make it easier for operators to produce more oil because it would be a death sentence for a second presidential term. An exciting subject, so we will keep you posted as to how this all plays out.
Our next story takes us abroad to Belarus. If you haven’t heard, Belarus is a hot spot in the news right now. They are having border disputes with Poland and are seemingly backed by their reluctant ally Putin. The European Union has been toying with the idea of imposing sanctions on the country, but Belarus came out swinging with a reply. They threatened to halt the natural gas supply from Russia to Germany if the EU goes through with it. This is not just a problem for Germany, but really a large portion of Europe. A significant amount of gas is delivered via this pipeline, and Belarus knows that winter is coming. A spokesman from Russia was quick to say, “Russia remains a reliable energy supplier to Europe, regardless of the actions of Belarus,” & “Russia’s reliability as a supplier and partner in the current and future contracts cannot be called into question.” This is their polite way of saying, “we want no part in this and are willing to deliver. It’s up to Belarus at this point.” This has the potential to make gas prices extremely volatile in European markets. Not only that, but consider that gas supply is already tight. This could force prices higher for everyone. Again, lots of potential for big things, so we will be sure to keep you posted as this story develops.
Next, you’ve likely heard of organizations like COGA, but a new challenger steps up. BOGA, or the “Beyond Oil And Gas” alliance. Led by Costa Rica and Denmark, the alliance is growing and adding other notable names like France, Greenland, Ireland, Quebec, Sweden, and Wales. Everyone in this alliance is aiming to immediately end new licensing for oil and gas production. Even California has somehow joined the alliance. I am absolutely thrilled to see a coalition like this form. It will present us with an excellent set of case studies where we can observe just how effective this method of stifling growth truly is. Again, all lip service for now, so something to keep an eye on moving forward.
Real quick before you go, we’ve got some spicy news: Shell plans on dropping the “Royal Dutch” part of its name and moving to the UK. Dutch officials say that they are unpleasantly surprised, but I don’t know what they expected after taking the company to court and ordering them to reduce emissions. I think the UK Government would welcome them with open arms, but I would be surprised if there was no public outcry from environmental activists.
Ladies and Gents, I’m afraid that is all the time we have for today. If you enjoyed this podcast, be sure to hydraulically frac that follow button on whatever platform you are listening through. You can find more stellar content on our website at www.rarepetro.com. I received no questions in our email this week, so if you have any questions related to energy at all we encourage you to send them to podcast@rarepetro.com. It’s free discussion over anything you’d like to hear about, so you might as well take advantage of it. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!