Join your host Tavis as he talks about high natural gas prices, why the UK is going bankrupt, and the future of crypto in Texas.
Audio Transcript
Alrighty everyone welcome back! This is Tavis Kilian with RARE PETRO bringing you another absolutely enthralling episode of Monday Madness on September 13th, 2021. Now, about those vaccine mandates… Just kidding! I had ya going for a second. That is beyond the scope of this podcast. Sure we cover political issues in the world of energy, but we do our best to provide objective information to allow you to draw your own conclusions. I might toss in a little bit of opinion here and there, but that is purely for discussions stimulation purposes. If you are new to this podcast, we request that you load up a couple of charges and perforate that follow button so you are notified whenever our content is released. Be careful though, side effects of listening to this podcast include developing even more wrinkles on your brain and bringing strong arguments to the table when discussing energy. But I know you didn’t come here for aggressive self-promotion, you came here to learn about the most revealing statistics and interesting events in energy. Let’s get after it!
First, we gotta check in on those WTI prices. At the time of writing, WTI prices are at $70.32. We’ve become pretty accustomed to this $70 ceiling now, and I’m sure you are sick of hearing me discuss fundamentals, so let’s turn our attention to natural gas instead. If you hadn’t heard, it has been taking off! From April to August it went from about $2.50 to $4. In the past month alone, it has gone up another dollar and is sitting at $5.24. That is a doubling in commodity price in just under half a year which is absolutely bonkers. So, what is driving this price shift? Thankfully this one is really easy to explain as it essentially boils down to supply and demand. In 2020, commodities prices cratered and the supply took a bit of a hit as well. Now bring it back forward to 2021. Consumption is approaching 2019 levels in many countries if it hasn’t already been observed. Pair that with an unusually hot summer in the states, and you’ve got increased electricity demand to cool homes. This is a bit unusual as the summer is usually a great time to store gas for the winter. With the demand outpacing the supply, that couldn’t be done. This means that we are facing a tight supply of natural gas for the first time in years. If the market isn’t able to introduce enough gas to offset the supply shortage, natural gas could climb even higher in pricing through the winter. I can already hear dads across the nation telling you to put on a sweater and turning the heat down to 65. Another thing to consider is that this is just from a domestic perspective. Natural gas use exists worldwide, but I’m getting ahead of myself. We will save the rest of this discussion for our news session at the end.
The rig count took a heavy hit last week as it dropped 11 thanks to Hurricane Ida. This week starts the reparations and the rig count is now up 6 bringing it to a total of 503. Louisiana is leading the rest of the states as activity resumes in the gulf with a gain of 4 rigs. Texas and Utah are also up with 3 and two rigs respectively. Pennsylvania, however, reported a loss of 2 rigs. Basin by basin, the Permian crushed it with 4 more rigs up. Interestingly enough, there is activity in the Mississippian basin as 1 rig goes up. Last week and a year ago this basin had no rigs. Other than that, there are 5 new directional rigs, 3 more vertical rigs, and 2 fewer horizontal rigs. All of these rigs are targeting oil. Not a ton of news in this category, but it is nice to see everyone getting back to business.
The last statistic to cover is the domestic inventory levels. If you caught last week’s Thirsty Thursday, you already know all about the situation, but in case you missed it, I’ll run through it real quick:
As the EIA reveals, crude oil consumption was minimally influenced by the storm as it witnessed a 1.5 million barrel drawdown which is about a third of what was predicted. The API saw slightly better results but still overpredicted a 3.8 million barrel drawdown. Actual numbers reveal that it was much closer to 2.8. Still, that’s no reason to complain as this is now the 7th straight week of drawdowns, or 15th if you ignore the 800,000 barrel build we saw in late July (by the EIA’s numbers, at least). Between a huge increase in road trips for Labor Day and Hurricane Ida, gasoline inventories had a hell of a drop (7.2 million barrels to be exact). The total gasoline inventories have now fallen to 220 million barrels leaving them at an unusual low when compared to the past 5 years. This primes gasoline for another week or two of record low territory. Due to damage to several refineries, the SPR loaned 1.5 million barrels of oil to an Exxon refinery in order to service the supply shortage. Gasoline is in high demand as many people rely on personal generators to address their power needs during the days and weeks that utility companies need to get things running once again. Distillates have taken a nosedive right up against the bottom of the 5-year historical range, and propane has just tiptoed out into record territory. THIS IS NOT A DRILL. We have been predicting record low propane inventories for weeks, and it is finally happening, albeit just barely.
But that is all you need to know about our standard statistics. Slightly pricier oil, much pricier gas, more rigs than last week, and inventory declines. Chalk that up to a winning week. Now to revisit that natural gas story I had been hinting at.
As we mentioned, natural gas inventories are low in the US and that is a problem for the rest of the world as we are the Saudi Arabia of gas and lots of people depend on our production of the stuff. The United Kingdom is one of those big customers, but unfortunately for them, they will be purchasing a lot more at this high price. Why? A lack of wind. The UK relies on wind energy to offset its carbon emissions, but the typically stormy North Sea has seen a period of calm that no one could have expected. This led to a sharp drop in the supply of energy in the region causing hydrocarbon-based plants to work overtime to fill the gaps. Since gas prices are so high, governments are also turning to thermal coal despite its notoriously abysmal emissions profile. This has also driven carbon credit prices to incredible highs. Because of this, consumers are paying for energy that is 7 times more expensive than it was this time last year. The UK is experiencing a similar problem to the US in terms of gas supply that is being exacerbated by their reliance on wind energy. Think about it this way: gas prices were so high that companies turned to coal forcing them to buy more emissions allowances. As carbon permit prices got more expensive, it isn’t as economically feasible to burn coal, so people turn back to gas, pushing gas commodity pricing even higher. As everyone is a consumer of energy, this forces the everyday household to shell out more and more money which is a problem in and of itself due to current inflation. The fast-approaching problem is one of environmental goals. Electrical system operator National Grid requested French Électricité de France SA to restart its West Burton A coal power station in Nottinghamshire. This is a great solution for now, but the government has said all coal plants must close by 2024. Should this occur further down the road, how will the issue be resolved? Right now the options include reserve thermal power plants, battery storage, or transnational cables to share electricity between markets. While these all seem like good solutions, I really think the world will continue to lean on natural gas to service its energy shortages in the future. Wind energy does have the potential to lower emissions and electricity prices, but it is imperative to have a backup plan for when the skies are tranquil and windless.
I’ve got one final story for you before we close off this episode, and it involves the push for cryptocurrencies to become mainstream. About a week and a half ago 200 oil and gas executives met up at the Houston Bitcoin Meetup to mingle with a bunch of bitcoin miners. As Texas becomes a growing hub for tech-based industry more and more oil and gas companies are turning to cryptocurrency as a way to put natural gas to work. If you aren’t aware of what I’m talking about, let me provide a little background. Lots of gas is produced in Texas whether it be flared, vented, or stranded. In many situations, it is possible to set up bitcoin mining rigs on location and power them with natural gas. These “rigs” are typically massive containers full of raw unbridled processing power and just as many fans to keep them cool and efficient. Whether the oil companies using their services rent out the rig or pay a day rate, they usually end up collecting enough cryptocurrency assets to pay for themselves. Pair this with China’s ban on cryptocurrency mining from earlier this year, and you got dozens of organizations looking for a new home for their operations. Texas has crypto-friendly politicians, a deregulated power grid, and abundant cheap energy making it a likely frontier for crypto. The benefits for the bottom line are clearly there, but what about benefits for the environment? As it turns out, flaring is only 75 to 90% effective at burning methane, but power generators are virtually 100% efficient. If this all proceeds well, it could easily be the end of stranded gas in the state. Folks, I believe we are at a very crucial point in defining the relationship between hydrocarbons and cryptocurrencies. If you looked into the parking garage of this meeting, you would see that a couple hundred very wealthy people would back me up in that prediction.
But that is the end of this episode! We hope you’ve at least learned a little something new, and if you did, go ahead and frac that follow button. It helps us reach a larger audience and helps you become a more established and knowledgeable energy professional. You can visit www.RAREPETRO.com to find more written and video content, and if you don’t find what you are looking for, send an email to podcast@rarepetro.com and I should be able to put a content piece together. We’ve got an interesting cryptocurrency article coming out soon, so be sure to keep your eyes peeled! Again, this has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!