A mysterious surge in commodity value, a social protest threatening energy, and a decision from OPEC to bolster prices.
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Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on October 10, 2022. What a great week of baseball with that wildcard series. I don’t know how many of you are into the sport, but there were some crazy games last week. The Cleveland Guardians lasted through 15 innings of a 0-0 game before smacking a walkoff homerun, the Blue Jays lost an 8 point lead to the Mariners, and the Padres played a damn near perfect game of baseball to steal away a playoff spot from the Mets. I’ve got my Dodgers cap on and I’m ready to watch that game one against the Padres tomorrow. Last year didn’t go so hot, and I know everyone says a 2020 championship doesn’t count, but I’m hopeful for this year. But you didn’t come here to talk baseball with a guy who only owns a Pujols Dodger jersey, you came to hear the biggest news and statistics within the world of oil, gas, and all things energy. Let’s get to it!
Commodity prices have been rocked hard the past few Mondays, and this Monday is no different. WTI finished last week above $92.50, but this morning has been unkind. The price has been pushed down to $90.64 so far, but shows no signs of coming back up. While that sounds bleak, try not to forget that last week opened up at $84. That’s a damn good increase that we have been fortunate enough to witness since the end of September. Brent continues to maintain a premium that has closed to about $5, but they too have been hammered by this aggressive morning drop. While oil prices seem to be back on a short term rise, natural gas continues to fall down, down, down. While we did peek up above $7 on Thursday, all that progress was wiped away this morning. It seems as if the price might bounce off of $6.500 but it is still too early (and volatile) in the morning to tell. Overall most things are down on the day, but oil is seeing a short term climb.
Now to look at the rig count. It has been climbing about as fast as molasses with no more than a +1 net change on the week for the past month or so. Today, almost a month of rig progress has been nullified. Negative 3 rigs on the week bringing our total to 762 which is thankfully 229 more rigs than we had this time last year. Basin by basin we saw the Permian finally increase one rig along with the Marcellus. The only area to lose a rig was the Haynesville. Otherwise we saw nothing else between the other major basins. On a state by state level, Oklahoma and West Virginia each saw a one well increase. Texas was somehow not able to add one, but it is better than Wyoming and Louisiana who lost 1 and 4 respectively. The Gulf of Mexico lost 3 rigs which makes sense when you consider what kind of weather it has been experiencing as of late. When you look at it from a Gulf perspective you can see why we lost 3 rigs. We really gained 1 rig by land but lost 3 in the offshore and one in the inland water environment. This primes us for decent gains once we are out of hurricane season, but doesn’t leave anything super sexy for the moment. This is a count that looks a lot worse than it actually is.
Lastly is another well crafted inventory report from RARE PETRO’s very own Nick Fernhout. If you don’t read Thirsty Thursday every week, I’ve got one question for you: Why? It is one of the most entertaining yet informative ways to understand the broad picture of what is going on in the supply side of things. If you missed it, here’s the rundown: The EIA had forecasted a build of just over 2 million barrels this last week against the actual reported value of a 1.356 million barrel draw. If you peek below you can see the API also forecasted a build of just shy of 2 million barrels. It is likely both of these forecasts were built on the premise that OPEC+ would indeed follow through with rumors of oil production quota cuts, hence increasing prices and lowering demand. In reality it demand has swung the other way and there was much more than expected. The API reported a draw of only 1.77 million barrels for last week, presumably for the same reasons as the EIA. We will look at gas prices near the end of the report, however, they have been declining week after week. With gas being so cheap as of late, people could be more willing to fill up before prices increase again, contributing to the modest sized draw. Not much is new on the SPR crude oil front. Last week’s most recent data point was 422.6 million barrels and this week’s data point is sitting at 416.4 million barrels. A difference of just over 6 million barrels, still right on track with that 1 million per day. Gasoline stock dipped this week, along with stock of most other things included in the report. Gas prices on the other hand have been nosediving for several weeks and seemed to be on their way back to “normal”. This week was when the pilot (strong demand in the pilot seat and OPEC+ in the co-pilot seat) decided to pull up on the yoke, now we are seeing a sharp increase in gas prices. Gas stations everywhere should be switched over to the winter blend by now which tends to be cheaper than the summer blend, so that could help maintain cheaper gas over the winter. Distillates will be an interesting graph to keep an eye on in the coming few months as one of its main uses is heating oil, which is more heavily used in the winter than in the summer. It has been getting colder and colder here in Colorado as I’m sure it is elsewhere in the US, which could be responsible for much of the dip in distillate stock over the past week. Propane and propylene on the other hand are surprisingly still on their way up!
That concludes not only the inventory report, but our statistics section as a whole(thanks Nick)! Next we’ve got some news to get into starting with a rather interesting story out of Iran. In the past year we’ve talked about Iran for only two different subjects: nuclear deal renegotiations, and breaching of sanctions (specifically in the sense of oil and gas). Now the country’s oil sector is on strike as it joins a nationwide protest that began 4 weeks ago. The protests started after a 22 year old woman who was taken into custody for not following dress code fell into a coma and then passed away. The police claimed natural causes, but her family rejects this possibility. Since then more and more people have been involved in anti government protests that have resulted in the death of another 185 people including 19 minors and 20 members of security forces. Now they are in the streets chanting “Death to the Dictator.” As I mentioned, the oil sector has gone on strike. I encourage you to try and find the video because it is a mass walkout of hundreds of employees from a refinery. What started as a small movement now threatens to overthrow the status quo established by the Iranian Revolution (now dubbed the “Islamic Revolution”) through means of economic destabilization. As of late Iran has been exporting some 700,000 barrel a month which isn’t massive on the world scale, but is still significant considering Iran makes billions of dollars a year in petrochemical sales. If the oil sector continues this protest, Iran will be losing millions every day. This shouldn’t disturb markets too much as China was receiving most of the oil anyway, but this is certainly one of the more interesting political stories we have had in recent weeks affecting oil supply.
A more significant impact on global supply and demand comes from OPEC and their recent decision. After one of their regularly scheduled meetings they plan to cut daily production by some 2 million barrels per day. This is the largest cut since 2020 and will fall on Saudi Arabia and other gulf producers. What is especially spicy about this decision is that it will be implemented just a few weeks before the EU enacts its embargo on Russian oil imports. That is a lot of significant variables in a rather short amount of time that could seriously threaten the global balance of supply and demand. If I had to put money on it, I think that is exactly what these countries want. OPEC will likely buy Russian oil en masse, and sell the stuff to the rest of the world anyway while commodity prices are up. This doesn’t only increase their oil revenues, but prevents US oil from filling the gaps in supply. Even though some folks aren’t as bullish as RARE PETRO about $120 oil through the holiday season, more and more people are starting to reevaluate their estimates. Goldman Sachs has now raised its Brent Crude price forecast for this quarter from $100 to $110. Either way, I am very stoked to see what happens this winter.
Everyone got scared, but RARE PETRO stuck to its guns. It is still too early to know if we are correct, but it sure seems like energy is going to get much more expensive this winter. There are far more significant stories about supply disruptions rather than more supply coming to the table. It’s a volatile time to exist, but there is plenty of information to take in so that you can make the best decision and come out on top. Why sift through all of it yourself? RARE PETRO continues to release quality content and research so that you don’t have to do it yourself. I’ve got a whole bunch of other work to get to, so we will have to cut this episode here. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care, everybody!