Supermajors setting new records, political theatre, and China’s gas problem.
Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on November 1, 2021. I hope you all had a wonderful Halloween, but now the holiday season is approaching. Before we know it, it’ll be 2022, which is kind of strange to think about. Also, we’ve received some applications for the student associate position, but we will still be accepting them for another week or two, so be sure to send your resumes to podcast@rarepetro.com if you would like to be considered. Again, you would be generating media for RARE PETRO and learning loads in the areas of geopolitics, markets, commodities, and current events. That is how I started out and it has been nothing but helpful for the development of my career. But I know you didn’t come to a now seasoned media producer reminisce on his younger days as an engineer, you came to hear the hottest news and statistics in the world of oil and gas and by golly I’ll give it to ya.
Of course, we’ve gotta kick it off with some commodity prices. At the time of writing this script, WTI is sitting at about $84 a barrel. Last week’s range was between $85 and $81 and largely a result of people’s waning confidence after another inventory build. Still, it is difficult to complain when prices were only about $77 a month ago, and the trendline is still pointing up. Natural gas is not doing nearly as well as oil. It is currently $5.325 and spent almost 24 hours above $6 last week. It is likely only a matter of time until it gets above $6 and stays there, and cold weather will most certainly be that catalyst. Nothing very strange going on here as these prices have really spent this year marching upwards, and they have the potential to go even higher depending on just how cold it ends up getting. I don’t know if you remember but earlier this year, specifically Monday Madness from January 11th of 2021, Spain’s natural gas prices soared to over 3 times the average price of natural gas in 2020. This was because they saw a record amount of snow and cold in the region and did not have the proper amount of natural gas ready to go. Not saying that is a guarantee for anyone in the world, but it is likely to happen to somebody.
Next, the rig count. The US total has increased by 2 and sits at 544 which is 248 more than we had this time last year. Another rather quiet week with little change overall. The Williston and DJ-Niobrara each gained a rig, but all other major basins saw no change. State by state, Colorado, North Dakota, and Texas and saw a 1 rig increase. Louisiana was the only major oil-producing state to report a 1 rig loss. Of the net 2 rigs, 1 will be targeting oil, and 1 will be targeting gas. Surprisingly, one of them will be vertical. Otherwise, not too much else went down here, but it’s still good to see a rig count.
Next, Thirsty Thursday is published on our website every Thursday afternoon and encapsulates all of the most important inventory data that you should be reading. It’s lots of fun and features a new cocktail each week. If you didn’t get the opportunity to read it, here is what you missed:
Last week the EIA predicted a modest build but witnessed the slightest of draws. We anticipated a future trend of increased draws following that report, but this week’s report has smashed those dreams. After the forecasted 2 million barrel build we actually saw a 4 and a quarter million barrel build. The API predicted a slightly smaller build at just over 1 and a half million barrels, but their report shows a 2.3 million barrel build. Even with these builds, oil inventories are hugging that low boundary of the 5-year range and may just barely keep itself from falling into a record low by late November (assuming the current build trend continues). This winter will present some challenges for all forms of energy so inventories may not be in the clear just yet. Even the CEO of Blackstone believes that high energy prices will lead to civil unrest. Given the past 2 years of events, I’d almost be inclined to agree with him, although that is an outcome that we would rather not encounter. It is too difficult for operators to borrow the much-needed capital required for drilling new wells, so this building trend can’t hold for so much longer. Even though crude saw a significant build, gasoline inventories continue to fall. The EIA recorded another 2 million barrel drawdown for the previous last week which leaves us 3% below the five year average for this time of year. The gas price has only increased 3 cents over the week which is down from the 3 previous weeks of 7 cents, 5 cents, and 5 cents. This still leaves prices higher than we have seen since late 2014. The minimum price for gasoline is now in Oklahoma at $3.02 per gallon. California is king to the highest gas prices at about $4.58 per gallon of regular gasoline. San Francisco has now set the record for the highest price of gasoline in the city since 2012 at $4.75 per gallon. This article goes on to say that it is unlikely the price will go down unless oil production increases to match the demand. Unfortunately, Governor Newsom is doing his best to further restrict production with new setbacks. Hopefully, we wake up from this bad dream sooner rather than later, but it might not happen until energy prices are absolutely through the roof.
Distillates experienced no change for another week, while propane has finally breached back into the historical 5-year range. But don’t celebrate too soon as even propane companies are still wary. In fact, some companies are arranging payment programs to help alleviate the financial stress for those who are dependant on the fuel. Many rural Americans rely on propane to service their heating needs as their homes may be too far away from a town or city’s infrastructure to be tied it. The next inventory report or two will be crucial in identifying how expensive heating will be this winter.
Let’s kick the news section off with something good. I feel like we spend a lot of time looking at news that wants to see the death of the industry, because there is plenty to be found, but it’s now November and I could do to be a little more thankful. With commodity prices rising up, oil companies are finally starting to see some cash flow. Exxon and Chevron reported their most profitable quarterly earnings since before the pandemic. As a matter of fact, Exxon reported earnings of $6.8 billion, its best quarterly performance since 2017. Chevron generated a little less at $6, but this is still its best quarter since 2013. As far as free cash flow, this is the best Chevron has ever seen. At this point, investors have one big question on their mind: “What will these companies do with the money?” Is it possible that this is the beginning of frivolous spending and an era of dumping money back into exploration and production, or will it be a period of reflection where these companies attempt to learn from the mistakes of their past? So far, it seems like the latter. It seems like the supermajors will be sticking to smaller budgets and pledging to return more cash to shareholders. If we look at super majors across the pond we can see that lots of companies are putting profits into renewable energy projects. After Dutch courts made an example out of Shell, you can kind of see why companies like Total and BP are starting to pursue these “green” projects. Chevron CEO, Mike Wirth, still maintains that it is not in the company’s best interest to get into green projects. It is not their expertise, and they aren’t confident they can generate returns. It seems that he has not yet backtracked his comment about investors using their dividends to “plant trees” so it is nice to see that the public hasn’t canceled him yet. Overall, it seems like supermajors are taking it slow and steady to build a responsible repertoire with investors, activists are non-activists alike. Pierre Breber, Chevron’s CFO, said, “We really believe the winning combination for investors is the traditional business that’s high return, low growth, low carbon combined with faster-growing new energy businesses.”
The next article I was going to visit was the meeting hosted by the Democrats on the House Committee on Oversight and Reform. Several supermajor CEOs were there and most of the intent was to… I’m not exactly sure. It was supposed to guide decision-making for the $555 billion set aside for climate-related provisions, but it all came off as very substanceless and pointless. I personally hate having to side with any party, but Republicans called the meeting political theatre as it came off as Democrats simply accusing the companies of not actually caring about climate change. If you’d like to find out more, I suggest you search for information on the hearing, but the only golden nugget of information I found worth reporting was a statement by Ohio representative Jim Jordan: “I’ll tell you what’s frustrating is a member of Congress telling American oil-and-gas companies to reduce production at the same time the President of the United States is begging OPEC to increase production.”
Before we wrap things up, I’ve got one more story about China and its natural gas demand. Specifically, their demand is supposed to rise about 10% from the previous year. PetroChina, the country’s largest producer, has secured 3.7 trillion cubic feet which is shy of the 6.3 trillion that will be required. Of course, there are other companies also producing significant quantities so it is possible the country is very close to obtaining its goal. China is anticipated to see much colder winters in the North and less rainfall in the south with the el Nino weather pattern returning this year. This means demand for heat will be high in the north, and typical methods of power generation in the south will have to rely more heavily on natural gas. Still, it seems like everything is prepped and ready, but the central government has been asking companies to step up their efforts in the realm of securing gas supplies. Not only that, but Sinopec is actively increasing gas storage for emergency supplies. Time will tell just how prepared the country is for the cold winter weather.
But that is all we have for the episode. I did not receive any questions related to energy, but if you have them please send them to podcast@rarepetro.com. It is free advice and research for any simple questions you might have! Other than that, we will still be accepting those student applications for a little while longer so go ahead and send in your resume to podcast@rarepetro.com to be considered for the student associate position on our media team. If you still have some questions as to what the job description would entail, you can send those questions to the very same email. This has been Tavis Kilian with RARE PETRO and until we see you next time, take care, everybody!
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