What the Supply Chain Tells Us

Freedom Financial Archive | Originally posted Jan 11, 2023
  • Frac spread counts are critical to the energy supply chain. We’ll define them in full.
  • Is it the end of the petrodollar? Let’s take a sober look.
  • The Petroleum Administration for Defense Districts explained

Here at Freedom Financial Research, we’re thrilled to have Mark Rossano as our NEO Report editor.

We can’t tell you how much our conversations with Mark have contributed to our understanding of the global oil and gas markets and their capital flows.

We call Mark the “Sherlock of the Supply Chain” because of his encyclopedic knowledge of the energy markets.

He’s the reason we knew the EU sanctions and price caps wouldn’t work.

And there’s literally nothing Mark has been wrong about so far.

His generosity with his knowledge will, we hope, give you a clearer outlook on what’s going on in this crazy world.

But before you take advantage, we’ll introduce you to a couple of terms.

Frac Spread: While the drilling rig count is an important signal for the future of oil (and gas) production, drilling a hole in the ground is only half of the process (and only one-third of the cost).

After the hole is drilled comes “completions,” fracking and other work to get the hole producing and connected to a pipeline.

Fracking is done by a collection of equipment, things like high-pressure pumps. It’s known in the industry as a “frac spread” (or a “frac fleet”).

Counting the number of frac spreads is a better indicator of how much oil will come online than counting active rigs.

Part of Mark’s secret sauce is that he can predict the production output of oil companies using the frac spread count.

Weight of Crude: Heavy oil (like Canadian or Russian Urals) evaporates slowly and contains material that will be used to make heavy products like asphalt.

Light oil (like West Texas Intermediate) requires less processing and produces a greater percentage of gasoline and diesel than heavy oil.

PADDs: The Petroleum Administration for Defense Districts (PADDs) are geographic aggregations of the 50 States and the District of Columbia into five districts.

Here’s a map of the PADDs:

Credit: eia.gov

Now that you know the terms, enjoy Mark’s analysis of the current state of the oil market.

Frac Spread Count Updates

The frac spread count fell in line with seasonal norms, so there hasn’t been much change to report.

Everything is moving along our expectations. But even as things cool down, the cost of operations in the oil patch remains robust.

Given the steel and labor situation, this isn’t something we expect to improve over the next few quarters.

The real estate/housing sector dipping hard will be good (in the long term) for steel piping. But in the interim, prices will stay elevated.

Even as they pull back, pricing is so high, even a reduction in prices will remain at extremes.

The Permian will see more significant drops over the next few weeks, but some of the other larger basins are already running at lower numbers.

So, the drop-off won’t be as severe as in previous seasonal cycles.

On an operational update, market participants said that Canadian heavy crude’s discount to WTI (West Texas Intermediate) widened to nearly $27 per barrel at the U.S. trading hub of Cushing, Oklahoma.

“West Texas Intermediate” (WTI) oil is another benchmark used by oil markets, representing oil produced in the U.S. It is based on oil at a large tank and pipeline hub in Cushing, Oklahoma. Like Brent oil, WTI is priced as light oil but doesn’t have the same global reach.

The End of the Petrodollar Is Greatly Exaggerated

Saudi Arabia and China met in Riyadh and came out with some very “aggressive” commentary.

The most critical comment is the last one: discussing the “end to the petrodollar.”

I have heard since at least 2006 how the US Dollar would be replaced. The U.S. dollar isn’t going anywhere as long as the U.S. Navy sails the seas and patriot missiles protect Saudi Arabian assets.

The Yuan and Chinese economy are in a terrible place with more weakness to come, especially on the debt and currency side.

I’m not saying the US Dollar doesn’t have its problems.

But jumping from USD to Yuan only leads to more problems… not less.

People continue to overestimate the Chinese economy.

And the issues of massive spending, wasteful building, and substantial debt loads (with little collateral) keep the likelihood of a broad adoption unlikely.

Let alone the strength, size, and influence of the U.S. Navy. So, everyone can talk a great game, but the US Dollar survives this round.

  • “China will continue to firmly support the GCC countries in maintaining their security… and build a collective security framework for the Gulf,” Xi said on Friday at the start of the China-GCC summit.
  • “China will continue to import large quantities of crude oil from GCC countries on an ongoing basis,” he said, vowing to expand other areas of energy cooperation, including liquefied natural gas imports.
  • Additionally, Xi said China would make full use of a Shanghai-based platform “to carry out RMB [yuan] settlement of oil and gas trade” — a move that, if Gulf countries participate, could weaken the global dominance of the US dollar.

I believe the next Bretton Woods will see the USD lose some influence, with currencies backed more by “hard assets and commodities” gaining some relevance.

But a weakening of the USD hold as the reserve currency is by no means a replacement… more to come on this fun topic.

The above will result in a drawdown in PADDs 2 and 3 and help the Gulf Coast draw down crude in storage, which is always the name of the game during tax season.

Typically, PADD 3 sees outsized draws in late November and all of December as companies reduce their crude in storage.

This is to reduce their tax bills by limiting imports, maximizing exports, and increasing runs to turn crude into product.

In January, we usually get outsized builds as the companies reverse course.

One Last Thing

What if I told you Mark had developed a way of using the frac spread count to predict which oil companies’ production will go up?

That would undoubtedly help you profit from what’s happening in the supply chain, wouldn’t it?

That’s why I’m so passionate about Mark’s offer exclusively for Freedom Financial Daily Readers!

When someone throws you a grapefruit down Broadway, hit it out of the park!

And have a wonderful day ahead.

Kind regards,

Freedom Financial News