Commodity records, first new wells in 9 months, and the “bright” ideas of international government.
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on the windy California morning of October 11, 2021. Let me tell ya folks, we’ve got a great episode ahead, but first… do you watch any true-crime series? It seems they are the only type of documentary available on Netflix anymore. It was recommended I watch the one about the Cecil Hotel in LA now that I am down in California. Definitely lots of interesting history in there, but the case they focused on took 4 hours to present over 4 episodes only for them to reach the end and say there was no murder. It was just an accident and internet sleuths ended up doing more harm than good in regards to the progress of the investigation and people involved. I know its about the journey and not the destination, but it almost makes me wish I took a peek at the Wikipedia article to save myself the time of wading through 4 hours of “what-if” before it turned out the principle of Occam’s Razor held true. Do you have any documentaries you recommend of any genre? Go ahead and email me at email@example.com along with any questions you may have about oil or energy. But I know you didn’t come here to listen to a podcast about true crime. There are dozens out there fully dedicated to the topic. You came here to listen to the biggest events and data in the world of oil and gas, and by golly, I’m gonna give it to ya!
Perhaps the most exciting statistic of the day: WTI prices! At the time of writing this script, they were at $81.09. Holy Moley folks. We haven’t seen prices this high since the end of 2014. In fact, it’s about 10 days shy of being exactly 7 years. We’ve been saying it for almost a year now. It started out with recognizing that most companies had hedged themselves into a bad corner. Then we saw that the DUC count was dropping at an alarming rate. Then we noticed that companies were putting all their money into debt because they weren’t receiving the investments necessary to justify new wells. This isn’t us saying, “I told you so,” but rather us trying to highlight the importance of knowing your history and looking at the data. Even if the major publications report an article titled “The Death of Oil,” it doesn’t fully alter the trajectory of real-world practices. That being said, we’ve only been in this $80 territory for a few hours now. It is entirely possible that this could be the next ceiling. After the Monday volatility, we could close below $80 and spend the rest of the week bouncing up against it. You never really know. The only thing you can be sure of is learning a new thing each time you tune in to this podcast, so go ahead and hit that follow button so you don’t miss out on the commodity only second in value to time: knowledge.
Natural gas prices aren’t seeing the love that WTI is receiving. They’ve actually dropped dozens of cents since opening this morning. I’m confident gas will see a similar spotlight soon. It has just gone up so aggressively in such a short amount of time that resistance like this is only natural. If it doesn’t happen in the next couple of weeks, it will be primed for liftoff in the cold months of winter.
Next up, the rig count. More good news here as the US is up 5 rigs bringing us to a total of 533 which is a 98% increase from a year ago. Again, the Permian is the dominating basin with 3 new rigs. The Eagle Ford and Marcellus tie for second at one rig each, and the Utica loses 1. It’s a mixed bag if we look at it state by state. Texas leads with 4, then West Virginia with 2, and California and Oklahoma with one. Louisiana, Ohio, and Pennsylvania each reported a 1 rig loss. This week there is continued emphasis on horizontal oil wells and a decrease in rigs targeting vertical wels. Business as usual here and it is always a delight to see an overall build.
Our last statistic is the inventory report. Make sure you are tuning in to Thirsty Thursday! We release it every Thursday afternoon, and everyone who has read it has ended up enjoying it. A fun relaxed writing style with plenty of good analysis. Be sure to check it out on www.rarepetro.com. Here’s a quick recap: You may have noticed energy prices skyrocketing, but don’t be fooled. The EIA’s latest inventory report predicted a 400,000 barrel drawdown but found an actual 2.3 million barrel build. The API’s report was only marginally better. They predicted a similarly small drawdown, but still saw a build of nearly 1 million barrels. While the news agencies continue to bicker over whether or not we are actually seeing an energy crisis, these builds are making a poor case for it. Sure, domestically we are seeing builds, but other parts of the world don’t have access to some of the resources we’ve been blessed with. That or they have chosen to not develop them. Daily refinery outputs of gasoline fell 6% from 10 million barrels per day to 9.4 million. Still, we found a way to add 3.3 million barrels of gasoline to our domestic inventories bringing us to the middle of the 5-year historical range. Surely a build in the inventories this significant would mean that prices at the pump would lower a bit, especially after Biden mentioned he would launch an investigation into why prices have remained so high. Unfortunately, that is not the case. Average gasoline prices have made one of their biggest jumps in months up 5.5 cents from last week. Many agencies estimated prices would fall in the last quarter of the year. RARE PETRO did not. Here we are in the first week of Q4 already setting records in the wrong direction. Distillates continue to struggle to reach regular inventory levels as they fell 400,000 barrels. Definitely possible that more people are making use of distillate fuels in industrial settings as natural gas remains expensive. Propane inventories fell about 600,000 barrels keeping them in record low territory. We are approaching the season where these historically see trending drawdowns so these commodities could become much more expensive through the winter.
But that is all we’ve got on the statistics side of things, so now it is time we look at some current events.
This one takes place in the DJ Basin of Colorado, or more specifically, Weld county. PDC Energy and Bayswater E&P received unanimous approval from the COGCC to pursue the drilling of 32 new wells. These are the first authorized wells for the DJ Basin since the new COGCC rules went into effect in January of this year. This has attracted the attention of many investors. If you look at public companies operating in different states you would see a decent amount of growth through 2020. Colorado companies have gone up in value through this year, but not to the same extent because many people watched on to see whether or not the industry would have an opportunity to operate in the state. Between soft setbacks and many other new rules, I can’t say that I blame their concern. Bayswater won approval for 24 wells near the town of severance. No one in town opposed the project, and they will be operating within a few hundred feet of a few residences. In order to minimize their impact, they will be constructing sound walls, utilizing quiet frac-fleets, and laying temporary pipelines to decrease the amount of traffic required to complete operations. After all, if some of these methods are used to operate in downtown LA, there is no reason they can’t be used in Weld County. Perhaps this is a new beginning for the DJ. Sure, regulatory practices will be slowing some of the operations, but at the end of the day, work is getting done. Excited to see how things progress in the future.
In other news, the EU is looking at what options it can pursue to minimize the impact of the price shocks in the future. Right now, natural gas prices are at record highs thanks to supply shortages. Right now there are a few options on the table. Joint purchasing where members of the EU could pull or lend from a reserve of gas. There’s also tax exemptions or price caps. They are also considering long-term power purchases of renewable energy. In the worst-case scenario, there will be possible emergency income for households in the low-income range. Sure all of these are great bandaids but don’t address the root of the issue. We have an underinvestment issue in conventional energy. I believe it was Kevin O’Leary who was talking about it last Friday on NBC News, but the more government intervention we see in this capacity, the higher prices are going to go. We need to invest more funds into the shale technologies that allowed us to extract so much energy. Until we do that, there is going to be some very expensive energy that might come at the cost of rolling blackouts worldwide. Hopefully, we figure that out sooner or later.
Before we close out the show, we’ve got a question from Ms. Christine. She asks:
“With energy prices going up, how can someone invest their money? I’m not comfortable touching futures, but I would like to learn about it a little bit as my husband is a day trader by hobby. Thank you!”
Well, Ms. Christine, I have to be careful about how I approach this question as we are not allowed to provide investment advice. In fact, I will explicitly say, this is not investment advice. You must do research to prep yourself for this as any money you put into the market is money that you could fully lose. We can’t say “invest in this, invest in that,” but we can provide some pointers. You mentioned futures. Usually, you need a lot of extra capital to mess with this, and I would leave it to most professional advisors until you have a better idea of what you are doing. If you want to start a little smaller, look towards public energy companies. If you believe in a company’s ability to capitalize on these prices you can buy their stock. Otherwise, there are dozens of ETFs (exchange-traded funds) that are built around many commodities or their price action. I advise you to start small until you learn a little more over the course of time. I started practicing in energy investment in early 2020 and lost a good percentage of my portfolio value to the COVID fiasco, so again, know that the money is at the full risk of being lost. If even then you aren’t fully comfortable with the risk of losing money look at “Paper Trading” or “Stock Market Simulators.” These programs allow you to mock trade in real market conditions without any financial risk. That way you can learn without losing or gaining any money, which is still valuable. Again, let me be clear, none of this is financial advice and you are at risk of losing money when you engage in investing. I hope this gives you a good place to start and allows you to experiment with the dynamic world of energy markets. If anyone listening has questions about anything energy-related, please send them to firstname.lastname@example.org and you just might be on the next episode.
But that is all we’ve got for you. Thank you so much for tuning in! We hope you’ve learned something, and if you did, go ahead and frac that follow button so you don’t miss an episode. Again, this is Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!