Time to hit the ground running in Q4! This week we’ve got a big story regarding sabotage on Europe’s most important infrastructure.
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Audio Transcript
Alrighty everyone, welcome back! This is Tavis Kilian with RARE PETRO bringing you another episode of Monday Madness on October 3, 2022. Welcome to Q4! This is going to be a busy one as a bunch of projects kick off for RARE PETRO, and I’m helping another company by writing an engineering program to be executed under a state contract. Unfortunately, the state was not able to provide much information so there are a multitude of contingencies built in should I run into any problems, but fingers crossed it runs without any big snags. I’m staying busy, learning lots, but boy I gotta say I miss Colorado. I hear it is supposed to be getting a bit chillier, and that the leaves are starting to turn. I missed fall last year, so hopefully I can catch the tail end this year! But you didn’t come to listen to the personal diary entries of a young engineer with the pedal to the metal, you came to see a much broader picture regarding the world of energy and all the stories and statistics that come with that. Let’s get to it!
Commodity prices. How are they doing? Surprisingly, they’re pretty good. WTI is up to about $83 this morning. This is especially surprising because this time last week we were sitting at a barrel worth less than $77. On Wednesday it popped right back up to $80 and really stayed there through the end of the week. This could be the new floor for energy. It lines up with the valleys we’ve seen through 2021, and we could be headed way higher through this winter. Plenty of people have doubted, but RARE PETRO maintains the prediction that prices will be higher this winter. Even Brent is doing better, though perhaps not as good as WTI. The spread looks like it is closing just a bit to 5 and a half dollars. The current Brent price is about $88.50. Natural gas continues to fall lower and lower. Last week we spent a lot of time bouncing between $6.75-$7.00. This morning it fell off a cliff and has now dipped to $6.45. It is showing the tiniest of rebounds, though I am doubtful it will make up all of that ground that it lost. This could be the make it or break it point for commodities, so keep an eye out because the next month could be very telling.
Next up is the rig count. After a month of red we have done a couple of weeks of additional rig gains. This week is no different as we gain one more rig. Progress is slow, but still pushing in the right direction. The Marcellus is the biggest mover this week with 3 new rigs while the Ardmore Woodford and Cana Woodford each gained one. The Utica and Mississippian each lost one, but the Arkoma Woodford overshadows both of those with a 3 rig decrease. That brings the basin total from 8, to 5. Yeesh! State by state shows that Texas continues to lose rigs as it is down 2 with Ohio, Oklahoma, and Pennsylvania each down 1. West Virginia is up big with 4 new rigs which brings its total to 16, which is twice the total it had this time last year. Otherwise New Mexico and North Dakota are up 2 and 1 rigs respectively. The Gulf of Mexico saw no change. A slow rig count that certainly seems to be shifting priorities away from Texas, but a plus one rig count nonetheless.
Lastly, another masterfully written inventory report from Thirsty Thursday’s newest author, Nick Fernhout! As always, listening to the report is a fine way to consume the information, though we encourage you to see those great illustrations and graphics that he has chosen to include. Here’s the barebones rundown. Modest builds were expected by both the EIA and API this week, however, what was reported by each organization was quite different. Starting with the EIA we see they were a little generous in their forecasted build of nearly half a million barrels while they reported a draw of nearly a quarter million barrels. The API on the other hand forecasted a similar number, but not only reported a build rather than a draw but quite a sizeable one at that. Whenever the EIA and API report dissimilar numbers they seem to make up for it in the coming few weeks so that everything balances out, that may be something to consider as we await future reported actuals. Three things in life are certain, death, taxes, and the SPR will release 1 million barrels of oil per day. Isn’t that how the idiom goes? Well, until the end of October it is. Further and further down falls the level of oil in the SPR. We are now down to just 422,583 thousand or 422 million barrels of oil. It’s around this time that you start to ask yourself, how low can we go? When do we stop? Isn’t there a limit on how much can be taken out? Well stay tuned, there may just be a periodical shortly that will answer all your burning questions… The pattern of no more than three weeks in a row of either draws or builds continues to hold. Looks like Nick was just barely correct on his draw prediction from last week. Will we see a larger draw as is typical following a slight draw? Who knows, check back in next week and we’ll see. With hurricane Ian wreaking havoc in Florida, odds are demand will increase and we’ll see a draw next week. U.S. crude stock levels are continuing to level out following a 2 or 3-week stretch of climbing. Crude stock is feeling pressure from both sides as supply becomes tighter due to the loss of production thanks to the hurricane and demand falls on the back of subsequent higher prices. Gasoline draw this week seen on the graph below left correlates to the little bump in prices seen on the graph below right. It’s a beautiful thing to see the basic laws of economics at play. Gas prices in California have soared to $6.181 on average, meanwhile, Mississippi is still enjoying low prices of $3.063 on average. Unplanned outages at refineries in California are causing a slight shortage, driving gasoline costs way up in the state. Distillate and propane stock diverge this week as distillates take a dive and propane continues to climb. A mix of refinery hold-ups and a transportation sector that’s heating up is likely responsible for driving distillates downward. Overproduction of propane to be sent to Europe, which is reaching maximum capacity, is to blame for increased stock levels within the country. Such high stock levels are sure to bring prices down in the coming months.
And with that we have wrapped up our weekly look into statistics! Thank you again for another great report Nick. Now we have to look into some current events starting with the biggest event of last week: the failure of the Nord Stream system. Last Tuesday the Danish and Swedish detected leaks in both pipelines. These weren’t simple leaks, but ones described as “unprecedented” by the operator Nord Stream AG. While the initial cause of the explosion was unknown, everyone was quick to scream “sabotage.” Now that the leak has stopped, it is clear that several hundred pounds of explosives were used to damage the pipelines, but no one is certain who did it. Right now there are 2 prime culprits, the US and Russia. Russia claimed the US has lots to gain from destroying infrastructure like this to secure a larger market share of gas sales. Russia accused the US of switching from sanctions to terror attacks in order destroy European Energy infrastructure. Is that possible? It sure is, and wouldn’t be the most egregious operation carried out by the US in the name of energy. It is also possible that Russia is using this as an opportunity to shift attention away from partial annexation of key Ukrainian territories. That was a claim postulated by President Biden which I also consider to be just as plausible as Russia’s working theory. While there are dozens of other players that could be involved, there are no clear answers and Russia has claimed it will do its best to get the pipeline up and running by the 26th of this month. Since then, Norway has begun to post soldiers to protect energy infrastructure in the area. They expected more sabotage and did this in order to free up police resources that have been watching since the initial attack. They did not release much more details than the fact that they were running routine patrols due to the sensitive nature of the operation, though both Denmark and Sweden disclosed that the explosions measured at a 2.3 and 2.1 on their Richter Scales which is equivalent to a minor earthquake that could shake unstable objects. That’s a big explosion.
But even if the accusations about the US securing a larger market share as a gas seller are correct, it doesn’t quite matter since China is still finding a way to come out on top. That’s right, the market wildcard has reportedly been selling US LNG to Europe for big profits. Even though China signed these long term contracts months in advance, they continue to sell excess inventories to Europe since their domestic demand is comparatively much weaker. Last year China received 133 vessels of US LNG in the first 8 months, but this year, only 19 have been recorded for the same period. It seems that China exercised the classic, “buy low sell high” strategy and was able to fill their gas reserves much earlier. Not only that, but consider just how much money they are saving by buying Russia’s LNG to save for themselves, or turn around and sell once again. Pretty hard to determine where natural gas came from, and I doubt Europe wants to look a gift horse in the mouth. Things aren’t looking totally bleak for Europe as they have been able to fill 88.4% of their storage meaning that experts expect gas spot prices in those markets to fall in the coming months.
While it is certainly possible that their prediction is correct, there are dozens of other factors that would suggest otherwise. What are those factors, you ask? Well you’ll just have to frac that follow button and let RARE PETRO paint you the broader picture. As Nick mentioned in the Thirsty Thursday report, there are a few periodicals just around the corner. We just released an episode of Basin Breakdown, and I’ll continue to put out an episode of Monday Madness every Monday. There are plenty of opportunities to learn, and we do the hard work for you! This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care everybody!