The new omicron variant, federal updates, and the SPR dump.
Audio Transcript
Alrighty ladies and gentlemen, welcome back! This is Tavis Kilian with RARE PETRO bringing you a very thankful episode of Monday Madness. What a nice Thanksgiving holiday. Great to spend time with the folks you care about and have some fun. With December around the corner, I gotta tell you, I am excited to catch another break soon. It’s going to be a busy month ahead, so let’s push forward and finish strong! I would like to think I’m staying busy and going strong still, considering I’m recording this after writing it and getting back home only about 6 hours ago, so I know you can do it too. But I know you didn’t come here to listen to the exceptionally potent words of an amateur motivational speaker, you came here for the biggest news or numbers in oil and gas which we will have plenty to speak about. Let’s get into it.
Starting of course with WTI prices. Now it’s still early in the morning so the price could do just about anything, but the bigger point of interest was Friday. There was lots of downward pressure between the Biden administration’s new announcements (more on that later) but more importantly, omicron. If you haven’t heard it is the newest variant to crop up, and, like my uncle pointed out, is a perfect anagram for “moronic” but that is simply an observation and not a political statement. The new announcement has refreshed fears of suppressed demand recovery and forced the price to fall from a nice healthy $83 to almost $68 flat. Again, watch the price today as it will likely establish the tone for the rest of the week, but I anticipate it will continue to climb slowly. Supply is getting tighter and tighter, and winter is quickly approaching. Not only that, but more and more people seem to be over the idea of lockdowns as time continues to go on. It is a sort of, “boy who cried wolf” situation when another one of these variants is announced. Now I am not trying to say it presents no threat at all. Many folks have lost family members or had close calls themselves. I’m saying more people grow sick of these with each passing month. The price may not do as well as we thought it would in the short term, but keep an eye on this commodity as the next couple of months could get crazy. But, the same exact situation was presented to natural gas, and it reacted just a bit differently. It rose from 5 and a quarter to about 5 and a half before quickly falling on Sunday evening. Again, the end of today will likely set the tone for the week so keep an eye out on these too. I think extreme volatility is coming.
Next up, the rig count. Thankfully, this metric is still performing well so we actually have some good news to share this week. Overall, the rig count in the US is up six to 569 which is 249 more rigs than we had this time last year. Basin by basin shows that the Williston was a bit of a dark horse this week as it tacked 3 more rigs to its total. The Permian followed with 2 rigs, and the Marcellus with one. Everyone else saw no change except for the Haynesville which actually lost one. Nothing too out of the ordinary this week, which means things are pretty predictable state by state. North Dakota is leading the pack with 4 more rigs, Texas with 2, and Pennsylvania with 1. The past few weeks seem to have established a pattern of people targeting oil rather than gas, and this week is no different. All the new rigs will be working on horizontal wells in oil-bearing rock. A very standard report, and it is really nice to see the Williston receiving some love.
Our last statistic to cover is the inventory report which does not have a corresponding written report this week. I know, I know, you love those things because it gives you a break from the monotony of the regular week and affords you just a little bit of insight, and a new cocktail recipe. Don’t worry, they will be back later this week so be sure to mosey on over to www.RAREPETRO.com this Thursday afternoon. I can get you caught up on the inventory data, but the cocktail recipe will actually come as a courtesy from my mother. During thanksgiving, she dressed me up a cranberry mimosa and it wasn’t half too bad. Cranberry juice, champagne, cinnamon sugar for the rim, and a slice of apple to hang off the edge. Now for the important stuff. The EIA felt pretty good about consumption during Thanksgiving week. They expected a near half-million barrel drawdown. Nothing serious, but a modest improvement. Unfortunately, they undershot by a little bit. The resulting build was just over a million barrels. The API was a bit more optimistic as they predicted a million barrel drawdown, but the real numbers were closer to 2.3 million. Color me surprised. I believe last week I predicted an almost certain drawdown. Turns out it’s back to builds. If the pattern from before October continues to hold we can expect another two weeks of regular builds and another draw. Still, don’t be too alarmed. This is typically the time of year that we should be stockpiling these commodities. It is almost expected. Check out the EIA’s historical data. This is the time of year where the trend starts to push upward. In a couple more months’ time, we should have a pretty good idea of how bad things will get depending on how far outside of the 5-year average we are. Gasoline inventories came in with another minor drawdown at about 600 thousand barrels. Last week we saw gasoline prices level out, and this week we see them fall. Prices have fallen just shy of 1.5 cents from a week ago which is the biggest downwards movement we have seen for months. Makes you wonder, is it a result of the Biden administration’s SPR decision, or is it just strategic timing as markets start to take care of themselves?
But it’s time we delve into that SPR situation. If you hadn’t heard, the US has decided to release 50 million barrels of oil from the SPR while China, Japan, India, the UK, and South Korea do something similar. This was done as a response to sky-high energy prices. Let’s say this works out the way they expect it to. Oil prices will be artificially decreased for a period of time which may just force an increase in demand. I hear some Asian countries are looking for a bunch of cheap oil as things continue to improve. If that is the case, the increased demand will just strip away that bonus 50 million of US oil on the market and push the price back upwards. Another potential downside includes incentives. Why should US oil producers continue to drill new wells if the federal government can dump a significant chunk of production into the market willy nilly? Now, when I say significant, 50 million is the smallest “significant” number. That correlates to about half a day of world consumption in pre-pandemic times. The SPR couldn’t do this routinely as there are only 600 million barrels, but it certainly doesn’t make US oil producers feel very special. Also, this policy seems to support the production of fossil fuels despite the new rules on methane emissions and encouraging other countries, specifically OPEC+ members, to produce more oil. At the end of the day, this administration is sending mixed messages and slapping a big oil bandaid on an issue that runs deeper than just bringing 50 million barrels to the market. Unless the current administration addresses the issue of decreased production, decreased investment in oil and gas, and the quickly decreasing DUC account is going to push those prices much much higher.
Next, we have to address the new developments on the report conducted oil and gas leasing. Finally, we have some word regarding this investigation that seems to have been going on for almost a full year. The Interior Department released a report that recommends increasing royalty rates and rent for drillers, prioritizing areas with resource potential, and avoiding areas that can be used to develop wildlife habitats, recreation, or cultural resources. Ultimately, it was determined that “oil and gas failed to provide a fair return to taxpayers and inadequately accounted for its harmful impacts on the environment.” Minimum royalty rates are currently at 12.5%, but the current administration would like to make that number much higher. Even environmentalists are upset. They claim that the report does little to address climate change and shame the fact that it was released on a weekend as they feel that is the quietest possible way to do that. Mitch Jones, policy director at the environmental group Food & Water Watch, said, “A minor increase in the royalties paid by climate polluters will have zero impact on combating the climate crisis, and will in effect make the federal government more dependent on fossil fuels as a source of revenue.” Still, the administration continues to say one thing and do another. The Trump administration was on pace to approve 300 permits a month. What do you think the Biden administration was at? About 10% higher at 332 per month. Not only that, but if you remember last week, they auctioned off the largest section of the ocean ever seen in US history. Even though the administration claims to be dead set on slashing fossil fuel emissions, they are doing their damndest to sell just as much (if not more) than previous administrations.
Lastly, we should discuss this omicron variant. We already talked about the 10% crash, so right now the next biggest factor to consider is OPEC’s meeting next week. Already, the group was struggling to produce with their suggested quota, so this variant could be a blessing in disguise if it truly decimates the demand for oil and gas. Yes, air travel has already been restricted in certain locations, but I’m not sure if the consumption of oil will decrease enough in other areas. Think about it, there are a million Amazon trucks out there delivering one Christmas present to a household each and every day. Not only that but the pores are stopped up with many months’ worth of demand for products across the board. Like we mentioned last week, many firms and analysts are suggesting that the drop in price does not correlate to an appropriate drop in demand. “This is a huge overreaction in terms of the market,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. said in a Bloomberg Television interview. “This is the market pricing in the worst possible scenarios.”
But ladies and gentlemen, that is all we have to talk about for today’s episode. Sickness runs rampant, aggressive federal policies, and Christmas looming around the corner. You can say what you want about energy, but you can’t call it boring. As always, you can send any of your questions to podcast@rarepetro.com. You can also send your criticisms there as well. The last thing we want to be doing is spreading false information, so we encourage you to call us out. We hope you had a happy Thanksgiving and continue to tune in for the remainder of the holiday season. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!
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