Oil amusement parks, pleas from the presidential administration, and the beginning of the end of California.
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you an episode of Monday Madness on October 18th, 2021. Have you heard about the newest amusement park opening up known as “The Rig?” It’s a new Saudi Arabian project with big ambitions. They plan to convert a few offshore platforms into a sort of amusement park/hotel combination that allows you to pursue all of your favorite extreme sports, adventures, and relaxation. I applied for the press kit to try and get some information, so who knows. We might have a special segment coming out about this project as it is just so damn cool. But I know you didn’t come here to hear about the finest ways to go on vacation. I for one probably don’t make enough for that resort to even look at me, so let’s spend our time analyzing the biggest statistics and news stories within the world of energy right now.
First things first, WTI prices. I’ve got good news and bad news. The bad news is that the price is already down this morning, but the good news is that it is still at about $82 at the time of writing. Just a month ago we were at about $70 flat as we fought so hard to bust through that ceiling. This is one of the most accelerated periods of price increase we have seen in quite some time, so expect WTI to observe some technical resistance sometime soon. I don’t think the resistance will force the price down, but it might sit idly like natural gas prices. Speaking of natural gas, it is still higher than it was a month ago, but still falling from that $6 peak. I would not be surprised if it fell as low as $5.60 in the next few weeks, but I really doubt it will be spending too much time down there. As you know, we’ve got plenty of reasons to believe both these commodities will see higher prices in the next few quarters, and I for one am excited about winter. Well, excited to see what the prices do, but not excited about the energy bills.
Next, the rig count. A great week here as the US finds itself up 10 rigs. Looks like people are confident that oil prices will remain high for quite some time so more are beginning the process of drilling new wells. This is good, because the DUC count is quickly approaching zero, and we can’t have that as it would cause some severe price shocks further down the road. Basin by basin, the Cana-Woodford, and the Eagle Ford led with 2 new rigs each. The Permian actually lives in the shadow of the Eagle Ford today as it only added one rig. Love to see an upset! The Haynesville and the Utica were the only 2 major basins to report a rig loss. State by state we have Texas with 3, Louisiana, Louisiana, and Oklahoma with 2, West Virginia and Alaska 1, and New Mexico and Ohio lost one. These rigs are mostly directional and all targeting oil. This leaves us at a total of 543, which is 261 more than we had this time last year. Expect this statistic to continue to perform well for the next few months.
Lastly, the inventory report which you can have much more fun reading on www.rarepetro.com in our weekly Thirsty Thursday report. Here’s a quick summary if you missed it:
The EIA took their sweet time to release their data following Monday’s holiday, but it shows that we witnessed a build of more than 6 million barrels. The API came strolling through with a modest prediction of a 140,000 barrel build which is about the most technical way to say nothing will happen. Turns out, they actually witnessed a more than 5 million barrel build. When both the EIA and API predict builds this big, you know there is something going on behind the scenes… but what is it? Refineries are operating at roughly ~85% capacity or above lately. Sure the ports are blocked up in LA, but crude is still imported into other ports of the country at rates that are lower than 2020’s average. Again, we have to look at the bigger picture. Let’s take a look at inventory levels through the past couple of years. If you look at the inventory graph over the past 1 and a half years, it has absolutely jumped off of a cliff. Even if we see a 6 million barrel build, it is absolutely dwarfed by the 120 million decreases we’ve witnessed from July 2020 to the present. Yes, now it is in a historically stable range, but this is too great a change over too short of time for markets to withstand. Gasoline inventories decreased by about 2 million barrels in the past week. Still, they remain in a historically significant territory, and the supply changes have not been nearly as dramatic as oil in the past year. Even though gasoline inventories are comparatively much more stable, the average price for fuel still found a way to go up a little more than 5 cents. I thought I found a great deal on gasoline last week, but it turns out you have to be a member of Sam’s Club to get those deals, so I ended up waiting in line for nothing. Still, increased fuel costs are a problem everywhere. 3 days ago 8 states had average prices under $3/gallon. Today it is 5, and it could be down to 2 or none by next week. In fact, it is getting to be so bad that the White House is asking US Oil companies to help lower fuel costs. Unfortunately, the current administration kicked down the doors of the Oval Office with pens and paper aimed at conventional energy. Things were tough to begin with, but the combination of 2020 and new governmental leadership has not eased the stress that these companies are seeing. Distillate inventories are fighting to remain flat while propane’s run-up seems to be coming to a halt. Winter is going to provide downwards pressure on all commodity stocks, especially with the gas shortage forcing power plants to consider burning oil for energy all over the world. The energy crisis is here, and many people are blind to why it’s an issue.
But that is the end of our statistics, so it is time we get into some of our news stories.
The White House has begun reaching out to producers within the US to talk about strategies they can use to bring down rising fuel costs. I know some of you immediately thought, “Well we could start with legislation that doesn’t make it harder to extract our nation’s natural resources,” but I think we are quite a ways out from reaching any policies that will do that. One oil executive familiar with the matter said that any call by the White House for an increase in US production would likely fall on deaf ears, but this executive did not want to be identified aaaand I think that perfectly sums up the situation we have. After 8 months of the new administration’s policies hammering home their hate for hydrocarbons, a patriotic call to produce more for the good of the people at whatever cost would likely have no effect. These companies are already operating on razor-thin margins, and drilling new wells for the greater good likely wouldn’t help their balance sheets. Not to mention the fact that it takes months for a new well to be drilled and completed. Even if companies wanted to comply, we may not see results until Q2 of next year. The supply imbalance is moving much faster than the factors that are able to address it. I think Anne Bradbury, the CEO at the American Exploration and Production Council, put it best when she said, “By pursuing policies that restrict supply and make it harder to produce oil and natural gas here in America, Americans will have to pay more for their energy.” Succinct, and highlights the root of the issue that might harm many people this winter. But still, people’s opinions are seemingly delusional. I’m not trying to turn this into a podcast of personal attacks, but there is a paragraph from an opinion piece that a Bloomberg columnist wrote. I don’t want to reveal their name, but rather their idea. They wrote:
Currently, the world subsidizes clean-tech development while paying much more for a reasonably steady flow of fossil fuels. We’re entering a world where we must adequately price the benefits of renewables to ultimately render subsidies unnecessary. But we must also find ways to value some fossil fuels, for some time, and increasingly for their capabilities as backup rather than continuous supply. A good example, and one we saw this summer in California, is shifting gas-fired power plants from all-day baseload to meeting peak demand.
Two things here. First, if we rendered subsidies useless we would see far less progress in the world of renewable development. Natural gas would service the current energy deficit and drive everyone’s utility bills down. Second, hydrocarbons as a backup for peak demands sounds wonderful, but we better have god-tier batteries to support baseload demand during the rest of the day and enough renewable energy capacity that intermittency is rendered useless. At this point, people are witnessing the energy crisis and doubling down on renewables. I know I’m biased, but people tend to care less about environmental causes when their heat and internet are down for 8 hours out of the day. Cynical, maybe. True, yes.
Next, a quick review of the energy crisis developing in California. As you probably know, the state is hoping to close several hydrocarbon-based power plants. Now, power companies are doing their damnedest to secure enough power supplies to build the necessary infrastructure to support this removal of roughly 10% of the state’s power capacity. This hasn’t stopped state electrical grid operators from expressing concern, and why shouldn’t they? California has routinely struggled with power outages in wildfire season, and this year’s drought has only hurt its ability to generate hydroelectric power. Sure, you might be able to understand why they would want to get rid of these “fossil fuel plants” as they call it, but the last remaining nuclear facility is going to be decommissioned as well. Right now, there is one big hurdle make sure intermittency won’t be an issue, and that is large-scale batteries. While the capacity of industrial battery cells has made leaps and bounds of progress in recent years, they cannot operate indefinitely. Right now, the best available batteries on the market can really only be worked for about 4 hours before they need a break. I suppose that’s where the basis of relying on natural gas plants for intermittency comes into play, even though you can’t quite kick start an entire power plant at the snap of one’s fingers. On one hand, California is leading the charge into the renewable heavy power infrastructure. On the other, it will come at the cost of higher energy prices, so I am excited to see if the project is a success and if everyone is happy with the outcome. At the end of the day, we will certainly learn something from this large-scale experiment. Let’s just hope the response is not to double down if things get to be truly bad.
But ladies and gentlemen, that is the end of today’s episode. I received no questions about energy in person, or from our email account this week so we will just have to skip it. If you have a question about energy you may as well ask it so that it can be featured on next week’s episode. You can do that by contacting me, Tavis Kilian, in any way or by emailing podcast@rarepetro.com. Remember, the only stupid questions are the ones you didn’t ask and we do this show for you! We really enjoy engaging with everyone who enjoys this podcast. If you are looking for more energy-related content, you can find it on our website www.rarepetro.com. Lots of research-based articles in many areas of energy that you are sure to enjoy. Thanks again for tuning in to this episode of Monday Madness. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!