Germany steals a starved refinery, Biden administration plays SPR catchup, and Iran eyeing a big old piece of the black market pie.
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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 September 19, 2022. Do you folks believe in ghosts? I spent a couple nights at the Padre hotel in Bakersfield over the weekend. It is supposed to be haunted due to a number of incidents. A fire on the seventh floor, kids trapped in an earthquake in the basement, a number of suicides over the years… you name it. The bartender was telling us that her experiences had been from mischievous children ghosts that knock things off of the counter, but one night she was able to snap a photo of a little ghost face in a beer she had poured! I gotta say, I wouldn’t consider myself a believer of the conventionally paranormal, but I had never seen a beer foam die down like that. The only spirits I saw last weekend were the ones pooled up in the bottom of my glass! But you didn’t come here to listen to some watered down drunken reboot of ghost hunters. No no no… you came here to get all the latest statistics and most interesting stories within the world of energy.
Let’s get into it starting with commodity prices. Last week I predicted WT would settle down in the neighborhood of $85-$90 and that is about what we saw. Lots of time spent in the $87-$88 territory, though trends from the last few weeks would suggest we are probably headed lower. After we hit that peak of $120, it has been week after week of falling prices. Now there are loads of factors between fundamentals, economics, and geopolitics that I believe will eventually push that price right back up, but when I gaze into my crystal ball the near future seems to be an $82 barrel of WTI. Brent crude is moving the exact same way, but maintains a solid $6 premium. No surprise there. Natural gas had a little bit of a tumble last week. It opened around 8 and a half, climbed above 9, and fell all the way to 7 and half leaving. While it appears to be falling just like WTI, we are actually seeing a slightly different pattern. We are falling off the backside of a peak now, but the general trajectory for the past half year is certainly upward. Don’t get me wrong, WTI is doing well, but natural gas blows it out of the water on a percentage basis. Things may fall a little further in the near future, but these commodities are still at strong healthy prices.
Now for the rig count which has been… let’s just say “underwhelming.” After about a month of negative net change we are finally greeted with a green number! 4 more rigs on the week which brings us to a total of 763 rigs in the USA. That is still 251 more rigs than we had this time last year. Basin by basin we can see the Permian is on a bit of a rebound with 3 more rigs. The Cana-Woodford is up 2 rigs, and the Eagle Ford follows with one. The Williston was the only major basin to lose a rig. State by state you can probably guess that Texas is up big with a positive 5 rig change on the week, and Louisiana tacked one on to its total. New Mexico and North Dakota lost one rig each, but that mystery rig in Kansas is still up running. The pendulum swings from an emphasis of gas back to one of oil as more directional and horizontal wells are drilled. The gulf of Mexico gains back a rig that it lost last week bringing the total back to 14. Perhaps a bit quieter than you might expect but it is nice to see Texas on a small rebound.
Lastly of course is the inventory report. Nick Fernhout has put out another excellent Thirsty Thursday last week, and here is what he had to write. The EIA foresaw a modest build of 0.833 million barrels this week and reported a build of 2.442 million barrels. There are only a few weeks left of Biden’s plan to drain 1 million barrels a day from the SPR which has been slightly shrouding what is actually happening with stock levels. It will be quite interesting to see the API and EIA reported numbers in October when the SPR is out of the question and a few months later when the plan to fill the SPR back up is underway. The API expected a draw of 0.2 million barrels and must have been quite surprised with this week’s reported build of just over 6 million barrels. Is it just me or does it seem like both the API and EIA are usually quite modest in their forecasts and the reality that follows a week later is typically either much higher or lower than predicted? I’ll have to look into why that is; will report next week. Do you hear that too? Oh yes, it’s the sound of the SPR stock tank level continuing to plummet for yet another week. It can be difficult to see but the most recent data point is showing 434 million barrels. A week prior that number was 442.5 million barrels. If my math is correct that’s a difference of -8.5 million barrels, more than the 1 million per day per Biden’s plan. California is winning the race that no one wants to, highest gas prices in the country! They continue to pull ahead of Hawaii for the second straight week with a state average of $5.439 per gallon. Mississippi brings up the rear at $3.135 per gallon. From what I understand Mississippi has such low gas prices due to low fuel taxes and the fact that they are so close to several refineries. Distillate and propane stocks are on the rise this week! While it hasn’t cooled down yet here in Colorado or many of the other states, it feels like that time of the year is around the corner and that means only one thing, dropping distillate and propane stock levels. It seems as though distillate and propane stock is beginning to build ahead of those colder months, that may be where the pressure is coming from to try and get distillates back on track to be within the 5-year range.
Thank you Nick for writing a wonderful report! This brings us to the end of our statistics section. Now it’s time to get into some of our news. The big story for today developed through the weekend. As Ukraine appears to gain back more and more lost territory to Russia, Germany decided to get in on the action. The country moved to seize Rosneft’s Schwedt refinery which supplies 90% of Berlin’s fuel. Germany has made it clear it is ready to take whatever actions it can to protect its industrial base and ward off winter blackouts. As German politician Verana Hubertz says, “Over the next few months, we’ll have to continue to preserve critical infrastructure in order to achieve energy independence.” Unfortunately she neglects to mention that Germany is missing one vital part of the energy independence equation. Supply. What good is a massive refinery if you lack the energy resources to run it? Will they just hope to buy from the US? Maybe from China who will be selling them oil anyway? It just seems like a poorly planned move. It’s like running into Costco, cutting the power cable for a floor model TV, and running out the door. Sure you’ve got a TV that you might be able to get running after the fact, but the more immediate problem is that you pissed off the store and it’s no small item. Rosneft released a statement saying it will, “consider all possible measures to protect its shareholders, including legal action.” Another problem to consider is that this refinery is kitted to operate off of Russia’s oil from the Druzhba pipeline specifically. I’m not saying this was a poor plan on Germany’s part. They could certainly get this up and running. The risk of pissing off Russia just doesn’t seem to be worth the reward, but then again Germany has a bit more bite than some surrounding countries. I suppose the refinery wasn’t receiving energy resources anyway, so this does afford them a bit more wiggle room.
Next is a quick update on the SPR situation. The plan has been pretty poorly executed, and we are only a couple of weeks away from hitting that original 6-month deadline. In order to compensate, the SPR will be holding a 10 million barrel sale in November bringing the total sales to 165 million or the originally proposed 180, so it seems they are pretty dead set on hitting the volume and will ignore the deadline. Washington has also mentioned that there is no specific timeframe or price with respect to refilling the SPR, so it seems they are waiting for prices to come down. While that could be a good plan, I hope we aren’t kicking ourselves in the foot 6 months from now if prices are back up to 100+ dollar barrels. Nothing too shocking here, but certainly something we don’t want to leave on the backburner too long.
Next, something that has been a long time coming. Russia has had a massive share of sanctioned trades, and it steals selling opportunities from other countries. Iran is one of those other countries, and it has grown sick of watching Russia profit. They have about 70-93 million barrels stocked up in the Persian Gulf and the coast of Singapore. Their plan? Sell it at a 5-7 dollar discount to Russian crude. If this happens, we may see some rogue plays from OPEC countries who have also been hurt by the lack of market share. China sure don’t care where it comes from, so keep an eye on how this plays out because it could be the beginning of some very interesting interorganizational negotiation on OPECs part. Additionally, the G7 price cap only primes other countries for what may be considered “black market sales.”
Folks, it is going to get real hectic this winter, and I believe things will kick off this holiday season. The best thing you can do to make the most of market conditions is to keep yourself in the know! Let RARE PETRO do all the heavy lifting. All you have to do is sit back, relax, and absorb all the information we present so you can become the best possible energy professional you can be! You can find all of our other content at www.rarepetro.com, and if there is anything you’d like us to cover we always take suggestions. Simply email us at podcast@rarepetro.com. This has been Tavis Kilian with RARE PETRO. Until we see you next time, take care everybody!