Speaker 1:
From the library of the New York Stock Exchange at the corner of wall and broad streets in New York City, you're Inside the ICE House. Our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE and indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs and harness the engine of capitalism. Right here, right now at the NYSE and at ICE exchanges and clearing houses around the world. And now welcome Inside the ICE House. Here's your host, Josh king of Intercontinental Exchange.
Josh King:
60 years ago, inspired by the fashion of the post-war rebellious youth in West Germany, a group of British musicians playing a long-term gig at the Indra Club in Hamburg, styled their hair in matching mop tops and Don black suits for their set. The next year, four of them would record at ABBEY Road Studios, unleashing Beatlemania upon an unsuspecting planet. That of course is the short version. The truth was a long and winding road. The Beatles legacy continues to inhabit every corner of American society. In fact, Abbey Road, the 1969, Beatles album still notched 12th on the list of most sold albums of last year. Millions of musicians, artists and others have continued to be inspired by their music but not always in the way you'd expect. Now, in our place in a rural town and Upstate New York, I have a 1000 gallon propane tank that pipes gas to our furnace that boils our water, heats our radiant floor and branches to another line that brings our stoves and Cooktops to life.
Josh King:
That tank isn't an attractive thing necessarily, but it bears an uncanny resemblance to a certain submersible from The Beatles 1966 Revolver album. As astonished to learn that there are entire websites dedicated to sharing images of residential propane tanks painted to look like the yellow submarine. Think of it. Pop art honoring the great Czech German illustrator, Heinz Edelmann who created an art directed The Beatles character designs for their 1968 animated film named after the song that endures today across America camouflaging the steel repositories that provide affordable efficient energy sources for houses too far from natural gas pipeline services. I gotta get me a paint job.
Josh King:
Our guest today Rusty Braziel, CEO and Principle Energy Market Consultant at RBN Energy is one of the world's leading experts on the development of the propane markets. I don't know if he's ever painted a propane tank yellow, but he did take on a more traditional brute after hearing The Beatles as a kid. He started a band. While Rusty continues to play music today, he's best known for his other passion, the Energy Markets. Rusty developed a large loyal following throughout the energy commodities industry and certainly here at ICE due to RBN's famous daily energy post. The posts provide a fresh and creative commentary on Energy Markets, each inspired by a song to connect the topic to the pulse of the right tune. Our conversation with Rusty Braziel on the endlessly fascinating world of energy, right after this.
Speaker 3:
Whether it's markets, exchanges or networks, connection makes everything possible. The connection between data and technology, innovation and expertise and most of all, between people and opportunity. For over 20 years, ICE has transformed markets, products and processes to make things work better, faster, smarter for modernizing energy and commodity trading, to revolutionizing the bond markets. Whether it's the world's largest stock exchange or the dream of home ownership, we do more than see the big picture. We create it. You may not know our name, but we bet you know, our network. ICE make the connection.
Josh King:
Our guest today is Rusty Braziel, CEO and Principle Energy Markets Consultant for RBN Energy. Rusty's worked for companies like Chevron's US subsidiary Texaco, that's NYSE ticker symbol CVX for over 10 years, as well as Williams Companies, ticker symbol, WMB and many other firms. He's a member of the National Petroleum Council appointed by the secretary of energy back in 2018. And he's here with us Inside the ICE House. Welcome Rusty to the New York Stock Exchange.
Rusty Braziel:
Well, thanks very much for having me Josh. I really appreciate being here.
Josh King:
Take us back to that first moment you first picked up the guitar. You told me in an earlier conversation that it was The Beatles that sparked your interest in music. Do you remember the first song you learned to play? And when did you realize you had the skill and passion to start a full band?
Rusty Braziel:
Well, this goes back to the 60s and myself in several friends, we knew people that were in bands. We weren't musicians at all and never really thought much about it until we saw just exactly what reaction The Beatles were receiving. And that meant that the girls really did like The Beatles. So we thought, well, heck if we just learned how to play instruments, then girls would like us too just like The Beatles. And so that was really the sadly the primary motivation for us beginning to learn and in terms of what we thought we could do, we didn't really know what we could do or could not do. We just thought, well, heck if our friends could learn how to play instruments, we could too. I picked up bass and guitar. One of my friends picked up drums. The other could picked up keyboards and we started to play together. I believe our first song was Louie, Louie.
Josh King:
Louie, Louie. I mean, the typical origin story would include you playing in your garage to the consternation of your parents and neighbors but you and I are around the same age. For me I was just an infant that night, August 15th, 1965, when The Fab Four invaded Shea Stadium in Queens. But did your parents or someone else introduced you and was music a big part of the Braziel household?
Rusty Braziel:
It was not. My father had learned how to play a upright bass in a country band. Never did do a whole lot with it, so at least there was some music in our family, but my parents weren't too crazy about the whole idea of having amplifiers and loud music. For fortunately, one of my friends up the street was and so we actually practiced in his garage. So we went through that entire process and then just like every other garage band started playing in a little local venues and outside in parks. And just any place where anybody would let us play.
Josh King:
Your parents weren't too keen on it. So I'm sure that they were pleased that in the end you put at your rockstar dreams on hold and studied finance at college. What was your plan back then? And did you already have an interest in Energy Markets and commodities?
Rusty Braziel:
Absolutely not. My interest was of course, to become a rock and roll star. That was the plan. And we did pretty well in the early days. We had records out. We were on local TV shows that thing, across Northern Texas. And that's where we thought we were going to go. But I thought, well, just in case this doesn't work out and I knew a lot of folks where it hadn't necessarily worked out, I better have a plan B. So at that point in time, I shifted my interest in school, which had been pretty much non existent to business. And that was mostly because it was something that I felt like I could do that didn't require something like an engineering degree, as I went through the whole process of business education.
Rusty Braziel:
That was about the time when computers were really starting to be a significant part of everything that was going on in business. And it turned out that I had a pretty decent aptitude for computer programming. So although my major was business in finance, my minor was computer science. And I got to the point where I was doing work for some professors in order to be able to help them with projects, doing computer programming for them. Ultimately they offered me a research assistantship to be able to do that through their MBA program and that's really what ended up educating or providing my education and what was at the time called management science, which was the application of computer programming to analysis of problems, not just business processing like credit cards and that thing, but the analysis of business problems.
Rusty Braziel:
And when I graduated from school, it was with an MBA in finance and my school was Stephen F Austin in Nacogdoches Texas. And so it's not like getting an MBA in finance from Harvard or Stanford. It's a slightly smaller group of companies at that point in time that might hire you. But I found that there were a couple of energy companies that were interested in my background in management science. And based on conversations with those companies, I ended up going to work for a company called Skelly Oil Company in Tulsa, Oklahoma, in their management science department, doing computer programming. And that's what got me an... And to be honest with you, Josh, I told myself that this energy thing is probably not going to last. And that was during the days of what was happening in the Iranian oil crisis and gas prices were going up. And so I was convinced that, Hey, I'd do this energy thing for a couple years and then go get a real job.
Josh King:
I mean, while you were in Nacogdoches and studying management science really let's set the context because it was years of turmoil as the Western world, particularly the US, Canada and Europe faced petroleum shortages. First with the Arab oil embargo against the backdrop of the Yom Kippur War in 1973 and then with the Iranian hostage crisis beginning in 1979. How aware were you of the global context of what was happening as you were recruited by Skelly Oil that outfit founded in 1919 by Bill Skelly, Chesley Coleman Herndon and Frederick Pielsticker?
Rusty Braziel:
Very much so. And everybody was because you were dealing with high gas prices and every time that you opened up the new newspaper every day was another story about what was going on in oil markets. So I was very focused on what was going on. I thought with a finance degree, it's not exactly the number one choice that you would pick for where you would go with your career. So when I first went to interview with Skelly Oil Company, I was assuming that I am finance guy, I could work here for a while but it's going to be the petroleum engineers and the reservoir engineers, these folks refinery engineers that are going to be the people that are going to lead these companies. So it can't be a decent long term career path. At least that's what I thought at the time. Of course that was a very long time ago and it worked out all together different.
Josh King:
So Skelly would eventually become part of Getty. And today, natural gas is a global commodity but I grew up in a home where they converted the old oil furnace from oil to gas. And I got entranced by that blue flame through the burner window. In 1984, you joined Texaco to work on their natural gas business. Did you see the potential of that energy source back then? And can you take us through how the natural gas market has unfolded since then?
Rusty Braziel:
Well, just to take you through the career evolution, Texaco bought Getty. So Getty bought Skelly, Texaco bought Getty. And so I didn't actually change jobs, or I didn't actually change companies. I just went from one company to the next to the acquisition process. So initially after that acquisition, I traded natural gas liquids and natural gas liquids, propane, just like that yellow tank in your backyard. So that's what I did for six years. So traded NGLs, propane, ethane, normal butane, isobutane, natural gasoline. Those are all natural gas liquids that maybe we'll talk about a little later in the show following that the natural gas which had been for years and years regulated and not traded as a energy commodity was deregulated by the Federal Energy Regulatory Commission.
Rusty Braziel:
And as that happened, natural gas started to trade like a commodity. I had been trading commodities for six years with NGLs and with crude oil before that with Getty. And so that gave me the basis of really understanding trade markets, even though I didn't understand gas. So I was offered the job to run the natural gas trading and marketing operation of Texaco in Houston, and moved to take advantage of that. So it wasn't so much the commodity itself that attracted me, it was what was going on in the commodity market, that things were being deregulated. And that was going to certainly create a lot of opportunities, because most people in the gas business didn't know what commodity trading was at the time.
Josh King:
Following your time at Texaco , you joined Williams Companies, which is NYSE ticker symbol WMB. And you began to work on a new trading system that would become the genesis of Ultra. What were you building and did you decide to stake out on your own?
Rusty Braziel:
Well, we developed a system at the time Williams had not only natural gas pipelines. They also had a bandwidth business. As a matter of fact, it became the genesis of WorldCom, which has its own story that we don't need to go into today. But in any event they had a bandwidth business and they were trying to come up with reasons for why wall street should understand that they had natural gas pipelines, energy business and a bandwidth business underneath the same umbrella. So one idea was to actually create an electronic trading platform for energy commodities, because I had my background with computer programming and cause I had been trading energy commodities for years.
Rusty Braziel:
I was a ideal candidate for that job. So I transferred back to Tulsa, Oklahoma, which is where I'd lived before. And took over both business development and this new trading system that ultimately became known as Ultra, the piece of it that was trading natural gas liquids. Remember I'd traded natural gas liquids for six years of my life was called chalkboard. And that system became the first successful electronic trading system in the country for any commodity. Ultimately we traded other commodities. Ultimately that system was sold. As a matter of fact, the chalkboard NGL piece of that system was sold to a company called Intercontinental Exchange.
Josh King:
Indeed. And we talked to Jeff Sprecher about the early days of energy trading online. The predecessor of Intercontinental Exchange was Continental Power Exchange and that's where he built it from. And RBN Energy is a company that is all about connections, much like what Jeff built at Intercontinental Exchange. Tell us what led you to establish RBN Energy back in 2012?
Rusty Braziel:
Sure. Well, one piece of the career path that we left out was a company that we built in Denver, Colorado after I left Williams called Bentek Energy. And Bentek Energy was all about taking energy information and providing that information to the energy industry. About 2010, we sold that company to what's now S&P Global. So, after that sale I was then in a position to be able to start my own company, which is something that I've always wanted to do.
Rusty Braziel:
But the question is, how do you do it and what do you start doing? Well, I had a lot of experience with trading by the time we got through with selling Bentek. I had a lot of experience gathering information about energy markets. So the ideal business model for me then was to be able to take that data and combine it with both my experience and people that I've known over the years, people that have been in the industry for their entire careers that had the opportunity to help with building out information sources and taking on significant consulting projects where somebody really needs to understand the data behind a major decision that they're making.
Rusty Braziel:
So that was the idea of forming RBN, which stands for Rusty Braziel's Network, which means that there's a lot of people I've met over the decades that really know lots about different parts of energy markets. And whenever we do a project, whenever we do a report, wherever we do analysis, we bring in really smart young folks that know all the current technical skills with people that have been in the industry for decades that really understand the markets and know the people and put those two resources together to create solutions to complicated energy problems. And that's what the company's all about
Josh King:
To make it a little simpler Rusty I mean, music is a network unto itself, an artist or a singer songwriter needs to put together a great studio, hire the great band members for recording session, put them in that studio and make music together. And music serves as both a theme and amuse for RBN Energy with its backstage past model and use of song titles for its blogs and articles. Beyond being a unique differentiator for you, how does music help you connect with your audience and tell the story of the energy markets?
Rusty Braziel:
In ways that we never expected by connecting what we do with music, it basically allows us to talk to people on a more personal basis. So we have about, for example, on the blog we have about 35,000 people that receive the blog every single day. We get lots of emails back every day of people that said, "Boy, I really love your story today. And that song, I was engaged to that song or we had that song at our wedding or something like that." So it allows us to engage people on a more personal basis. And that's also part of the style of which we write reports. So in other words, instead of writing a report, I'll call it, since I am an MBA, I can say this, like an MBA would write it.
Rusty Braziel:
We write at a very conversational light, hopefully entertaining and somewhat humorous style. People in the energy business have to read a lot of boring stuff. So why do 35,000 people get our blog every day and spend 15 minutes of their life reading it? Well, it's because it's entertaining. It's because it's something that ties into their life and it allows us to get to know a lot of folks in a way that you never could, if you were just writing a standard old MBA looking report that they're going to force themselves to read because they know they have to.
Josh King:
In 2016, you published the domino effect named not for the band that gave us Layla, but rather the concept. What's the premise of the book. And how does the domino effect play out in the context of energy markets?
Rusty Braziel:
Well, I'll give you a little background first before talking about why I chose that particular title. When I was trading, I traded crude oil, I traded natural gas liquids and then I traded natural gas. Surprisingly, most of the traders at that point in time at Texaco, but at other companies too, in crude oil didn't even know the traders in natural gas. The natural gas traders and the crude oil traders didn't even know what building the NGL traders were in. You could trade a single commodity and have that commodity basically be independent of what was going on with the other pieces of the energy business. And that's the way the whole market worked. Shale changed that. As Shale really kicked in 10 years or so ago, the dynamics of the industry changed such that what you know about NGLs is going to be impacted by what's going on in gas and what's happening in the crude is going to be impacted on what is what's going on with NGL, give you an example of that.
Rusty Braziel:
So back in the early days of the Shale Revolution, it came first to natural gas and there were a lot of new natural gas wells that were drilled, well production of natural gas went up and because of that, the price of natural gas went down. So what did natural gas producers do? They said, "Well, hey, NGLs are still relatively expensive. Why don't we drill for more natural gas that contains NGLs?" So all of a sudden people were drilling for wells that are focused on NGLs and production of NGLs started increasing and kept on increasing and kept on increasing until the price of NGLs crashed too. And a similar thing happened with crude oil and along the way, things happened that nobody expected. For example, with all those NGLs chemical companies started building new petrochemical facilities that the whole business has been shut down before this. Started building these facilities, like it was going out of style, which meant that each commodity affected the other.
Rusty Braziel:
And it kept on happening that way in a chain reaction. So the idea was that the gas domino hits the NGL domino, the NGL domino hits the crude oil domino. And therefore, in order to understand any one market, you have to understand all of them. That was something that didn't exist before. People in the industry knew that, a lot of people not in the industry didn't necessarily know that. That was the idea of writing the book, did very well. It still used as the curriculum in a number of university programs right now for energy markets around the country.
Josh King:
If you were to go back and write a sequel to the book at any point, how would you update your analysis on the future of energy markets in this day and age, especially since the last 12 months have seen the energy markets so shaken by the coronavirus pandemic?
Rusty Braziel:
The coronavirus pandemic I think it's truly a blip. In other words, what's happened with the coronavirus and what happens to crude oil. It's a, big deal for markets. I mean, crude production's down and we've had a lot of trauma in the markets. But in the big scheme of life, that's not what I would do if I were to write a sequel to domino effect. It would be about how energy plays out over the next 20 or 30 years because of the Greenhouse Gas Initiative. Because of all the green initiatives that basically are talking about carbon neutral and what carbon neutral might mean or will mean for energy production.
Rusty Braziel:
There's a lot of people out there that want crude oil, natural gas and GLS to go away. And I don't think any of those products are going to go away any time soon but nevertheless, the markets for those products are going to change significantly over the next few years and understanding how the domino effect actually plays into that transition, I think is something that nobody really understands right now. There's just too many uncertainties about it, but we can develop a set of scenarios that how it might play out and I've got some folks right now trying to talk me into doing just exactly that. To writing a sequel and having that sequel be essentially around what happens in a Net Zero World to energy commodities.
Josh King:
And I think we're going to workshop some of the elements of that sequel for how energy markets work in a Net Zero World coming up after the break. Rusty Braziel, the CEO and Principal Energy Markets Consultant for RBN Energy and I are going to discuss all the important trends in the energy space to look for in 2021 and beyond. And that's all coming up right after this.
Speaker 4:
We started with a vision to transform energy markets, using technology to boost transparency and level the playing field. That vision and customer focus continues to drive how we look at opportunities and challenges in our industry. Today, we connect participants around the world so they can trade, hedge, invest and raise capital. We establish prices across asset classes and create opportunity to solve complex global problems. We provide pricing that markets rely on transform the way business is done. Help companies grow to fuel innovation and provide data to advance economies and society. While we invest in our communities. 20 years ago, we saw an opportunity to create a market driven by customer needs. Today, our markets create endless opportunity for participants around the world and our team is focused more than ever before to ensure the markets continue to function properly. On behalf of my colleagues around the globe, thank you from Intercontinental Exchange.
Josh King:
Welcome back before the break, Rusty Braziel, the CEO and Principle Energy Markets Consultant for RBN Energy and I were discussing his career and how the energy markets have shaped over the past few decades. Before we jump into today's market Rusty, behind you is an image of the early oil freighter Falls of Clyde transitioning under the Golden Gate Bridge. The ship in addition to having two episodes based on it in Magnum PI served as a tanker carrying 19,000 barrels for Tidewater, which would become Getty oil bringing Californian kerosene to Hawaii and returning with a load of molasses. Today even a small tanker would carry 10 times that amount and travel internationally. What's the story behind that piece of art. And what does it say about the scale and complexity of the oil markets today compared to a century ago?
Rusty Braziel:
Well, first of all unfortunately your audience can't see it, but that ship has mass on it. That's a sailing ship. So that was one of the very first oil tankers and the story behind it for me was a friend of mine and I went to San Francisco for a weekend, went shopping and I saw this ship and just liked it because it was a sailing ship going under the Golden Gate Bridge at the turn of the previous entry. So I thought it was a great picture. Brought it back to Los Angeles where I was working at the time, put it my office and the VP of Marine Transportation walks by my office one day and says, "Falls of Clyde." Of course, I thought he'd lost his mind and he went and grabbed a bunch of pictures from the Getty vaults and lo and behind it was a Getty/Tidewater ship.
Rusty Braziel:
Getty had acquired Tidewater at some point in the past and showed me the fact that this was actually an oil tanker and it was one of the very first oil tankers. Even the information that you found out there was more than I knew if you wanted know the truth. But yeah, I've had it on my wall ever since. And I think what it tells you is that the scale of, two million barrel VLCCs that move oil today, it's just a absolutely gigantic industry. And that's one of the things that when we talked about before this industry is so large, it permeates everything every piece of the economy, it permeate all of our lives, no matter what we decide to do as a society, around greenhouse gas emissions and all the things that the industry is transitioning through right now, oil's going to be around for a while. It's just too big.
Josh King:
You appropriately reference the song, Wild Things by the Troggs in one of RBN's latest blog entries to describe the volatile relationship between LNG and the Global Gas Markets. Along with the global pandemic this year, we've witnessed a historic hurricane season and in February in Texas, where 24% of our domestic natural gas is produced, experienced this extreme period of cold weather. How do you see US LNG exports faring both short and long term and where do you think we go from here?
Rusty Braziel:
Well, first of all, LNG exports have grown from just a little more than five years ago from zero to somewhere around 11% of total US production today. So the growth has just been astronomical over the last few years and that's because we can produce more gas than we use. And therefore it makes sense to export that gas to other regions of the world. So last year as LNG production was growing, it was a particularly bad year for the industry. As COVID hit the price for LNG, both in Europe and in Asia dropped like a rock. As a matter of fact, drop so far that the price in Europe and Asia was no higher than it was in Louisiana. And that means that processing gastric gas into LNG and then putting on a ship and carrying it halfway across the world is a very expensive proposition.
Rusty Braziel:
And if it's the same price where you load it and where you unload, it is not a very profitable proposition. So lots of cargo were canceled and a lot of folks were worried that was an indication of bad times to come for LNG. Not so at all, the LNG market at the end of last year, started recovering very, very rapidly. As a matter of fact, some would say even too rapidly, it just of spiked up there for a while. And production is coming on strong now, we have another three LNG export facilities that are expected to be completed over the next couple of years. So LNG exports will continue to grow. And I think in terms of what that means for the fuels, that LNG is replacing, which means wood and other types of fuel that people are using that create far more emissions than LNG does, it's a good thing for the environment and a good thing for the economy.
Josh King:
RBN Energy published a three part blog last year, that was really an owed to the unappreciated propane molecule and the journey it takes to reach its destination. For many of us, when we hear propane, we think of king of the Hills, Hank Hill, a Texas salesman working for fictional Strickland propane, who is known for his fanatical commitment for selling propane and propane accessories. What do you and Hank see in propane that most of us just miss?
Rusty Braziel:
Well, first of all, for those in your audience who don't necessarily follow the propane market, it's a lot more than Hank Hill and your barbecue. The 20 pound tank that's underneath your barbecue grill in your backyard. The US produces about two million barrels a day of propane. That's twice as much propane as the entire Permian crude oil production was back before Shale kicked in. So it's a lot of propane, far, far more propane than the US can use. And that growth in propane over the course of the last few years has been astronomical. One of the reasons why is because most gas that comes a long with Shale formations, a lot of it anyway, comes along with NGLs, a significant content of NGLs and propane makes up about a third of the typical NGL or natural gas liquid barrel. So we're producing a lot more propane, but it's primarily a byproduct.
Rusty Braziel:
It's a byproduct of the natural gas and crude oil production, that oil and gas producers are really going out and drilling the wells for. They're really not drilling to get propane. They're drilling to get oil and gas, and the propane comes along for the ride. So we've had a lot of propane production increases over the course of the last five years. Well, what do you do with it if you can't use it in the United States? We have to export it. But there wasn't nearly enough export capacity in order to move all that propane. So several companies, energy transfer, enterprise target have built facilities to export that propane. And they were exporting propane that we produce as a byproduct, therefore compared to a lot of the propane in the rest of the world, it was cheap. So what did the world do?
Rusty Braziel:
They started to build facilities to use that propane. Not only to use it in big tanks in the back of people's houses, but also to produce petrochemicals. Propane produces a lot of propylene. And propylene is used and everything from PPP, personal protective equipment or PPE or to produce auto parts or just about anything else plastic that you can think of. So as those plants were built, mostly in Asia, the demand for US propane has continued to increase over time. What's the problem with that? Well, we have lots of exports. We don't need it here. And therefore we kept exporting it more and more each year. Now we're still hitting all time record volumes propane exports even as recently as the last couple of weeks. What's the problem? Well now demand is so high, primarily in Asia for US propane, that there's a big question about whether there's going to be enough propane that's gong to be built up in inventory between now and propane heating season.
Rusty Braziel:
A large portion of propane demand comes in the winter and that big propane tank you've gotten back of your house, you're going use a lot more propane when it gets cold than you're using right now.
Josh King:
Yep.
Rusty Braziel:
Well, that's the case for everybody else too. Which means propane demand goes way up in the winter, which means the only way that the US can meet propane demand scattered all over the country, most of it is in the Northeast, the mid continent in other words, areas where it's cold, the only reason that the US can meet that demand is by placing propane in storage in order to meet winter demand. Well, if a lot of that propane is now going to international markets, the big for this year is there going to be enough to both meet international demand and build up inventories here for the winter heating season. Most likely there will be, but expect your bill for that big 1000 gallon tank in the back of your yard to be a little more expensive than it was last year.
Josh King:
Now I know from the It's A Gas Propane virtual conference, that RBN Energy held, which for full disclosure ICE was a sponsor of that. That at this point, we're facing the possibility of going into that next winter with propane inventories below, the five year average. What are the risks to the domestic and global propane supply if we get a more severe winter than planned, and what's the long term outlook for the fuel?
Rusty Braziel:
Well, we've been through a little of this before back in 2013, 2014 that was the year of the polar vortex. When the polar vortex hit that was a real cold spell that hit mostly in propane territory, if you will. So when that happened, it also followed a very heavy crop drying season. Propane is also used for drying corn and other products, particularly when the harvest season is wet, meaning there's a lot of rain. So I can't put my grain in storage until I dry it out, I'm going to dry it out with propane. That year there was a lot of crop drying that happened and right at the end of the crop drying season, which is primarily that late fall, then all of the, a sudden the deep freeze weather hit kicked in. And what that did is, that really drained propane inventory supplies all across propane country.
Rusty Braziel:
And when that happened, there were shortages. There were a lot of folks that needed propane where let's take, for example, you called up your propane supplier and said, "Hey, my a 1000 gallon tank in the back of the house is empty. Could you guys come over here?" And they might say, "Well, we'll get to you next week." You wouldn't be very happy about that, and that's the thing that happened during that period and the industry, frankly, got a black eye during that period, but the industry, took what happened, learned from it and then developed a lot of programs to be able to shore up supplies and shore up where inventory is located. So it's very unlikely that something like that will happen again.
Rusty Braziel:
So that means that when the freeze offs happened, that we're not only in Texas, of course, but also all throughout the mid continent of the US, when that happened in February, there were some shortages of propane, but generally the market for propane handled itself extremely well. And if you call what happened to electricity and what happened to gas extremely well is not the description that you would use to characterize what happened to those markets. So propane handle it pretty well. So getting back to your question then is if we end up with a shortfall in inventories by the end of the, the inventory bill season, that we'll be in now until the 1st of October or so, if we end up short, I believe the industry will do what it takes in order to be able to make do, even if we have a cold winter. It does mean that you're going to pay more for propane with it in that tank in your backyard.
Rusty Braziel:
But the global industry has a little bit more flexibility, for example, many of these petrochemical facilities what they call elephant crackers that make mostly ethylene can run other feed stocks besides propane. So if propane gets too expensive, they'll shift over and run NAPA, which is basically a cheap version of motor gasoline and be able to keep on going. So there's enough resiliency built into the industry for it to be able to handle it. Markets will make things adjust. The conference that you're talking about that we had last week, the most used phrase in that conference was 'price solves everything'. And what that means is that if you got a shortage, then price goes up and that means people figure out how to do other things, to achieve their objectives in order to avoid paying the higher price.
Josh King:
Talking about prices, Rusty let's flip to oil for a minute, April 20th marked the year anniversary of West Texas Intermediate WTI dropping almost 300% in reaching negative $37 a barrel. One could argue that a global pandemic and price war between two of the biggest oil producers made negative prices for the Oklahoma based crude, almost inevitable, but Brent, the global benchmark managed to stay at $26. Looking back what insight can you provide and couldn't have been prevented?
Rusty Braziel:
There were a lot of factors that went into what happened during that negative oil price on April the 20th of last year. So inventories at the delivery point of the New York Mercantile Exchange contract for crude oil which is cushioning, Oklahoma were filling up. A lot of people were concerned that it was going to fill up and most companies with storage capacity in that storage region were no longer accepting any barrels. But that's not really what happened on April the 20th. On that day, it was the point of delivery for that month's contract on the New York Mercantile Exchange. That's a physical delivery contract.
Rusty Braziel:
Most of the holders of the long positions on that day were not physical players in the market at all. There financial players. There were financial players that go along in the market funds, in other words, and they roll out of those positions at the end of the month by simply cashing them out and if they got a long position, they just do a sell against the long position. And they're fine, except for the fact that at that particular point in time, there was nobody to take those positions from them because if you take the position, then you actually have to take physical possession of the barrels.
Rusty Braziel:
So taking physical possession of the barrels was something that those financial players had no capacity to do whatsoever. So they had to sell their long position to somebody who would relieve them of their pain. Suffice to say that the market saw that and took advantage of the situation and that's what drove that price down to negative. In other words, yes, you have a problem. You can't take those barrels. I'll those barrels for you, but I'll only pay you negative $37 for that. Is that okay? And unfortunately they didn't have any choice, but to say, okay, so that's what played out.
Rusty Braziel:
Why was the Brent contract spared? Because Brent is not a physically delivered contract at settlement. Settlement is based on what I consider a pretty complicated set of formulas that index prices that are published by companies like plats are involved in. And therefore there was never a situation where somebody was forced to take barrels and forced to sell those barrels. And therefore prices never dropped below what I would consider their natural price level at the time. And at 26 bucks that was still darn cheap. So don't think that there were not a lot of people in pain with $26, but it never fell into the negative area because of the mechanics of the ICE delivery mechanism versus the mechanics of the CME delivery mechanism.
Josh King:
Today, Rusty publicly traded US oil and gas producers are holding back on their CapEx budgets, which is dampening growth in oil, gas, and LNG production volumes. If we set this against the backdrop of the growing importance of energy transition, which you mentioned earlier in the conversation, how do you think US oil and gas producers are going to navigate it?
Rusty Braziel:
Depends on which oil and gas producers that we're talking about. Large companies with a lot of scrutiny from public markets regarding both their behavior and what they spend their money on are going to continue to be subject to this capital discipline that you're talking about. And therefore the drilling plans that they had in place two years ago, we probably won't see expenditures like those out of these companies for a long time. But crude oil prices are in their 60s, crude oil prices in the Permian Bay center are in their 60s. A lot of companies already have lots of leases, lots of drilling spots, where they can drill wells right now and if they do at the $60 price, they're going to make 30% rate of return, 40% rate of return.
Rusty Braziel:
In other words, really good returns on any drilling that they do. And already we are starting to see smaller companies, privately held companies that are not subject to the same pressure as the big public companies starting to do what oil and gas producers do. They drill. I was one for 20 years. That's what you do If you're an oil and gas producer, because if you don't do that, then you don't have a job. So I believe that we may be surprised by what happens over the next couple of years with the overall production trends out of the Permian, out of the basins as well that it might be a bit more resilient than folks are currently expecting it to be based on what's happening just with the big public companies.
Josh King:
Recently, an article in the financial times discussed President Biden's green initiatives, noting that the carbon price and here I'm going to quote "Was conspicuous by its absence," from the Biden overhaul, although California has had its own cap and trade program for a number of years, there's still no national US wide equivalent. Do you think there are merits to a carbon price that the current administration hasn't seen or do you think President Biden's firm stands and emission standards is the way forward?
Rusty Braziel:
Well, the thing about price for carbon and by the way, the American Petroleum Institute, and most of the big oil and gas producers have signed on to a price for carbon with a cap and trade type mechanism to be able to basically flexibly manage the process of reducing carbon emissions. So in other words, if I produce carbon dioxide, let's just go with carbon dioxide for a second. If I produce carbon dioxide and it's going to be phenomenally expensive for me to be able to solve my problem, but you produce carbon dioxide and you can make yours go away fair to a cheaply, then why don't you make yours go away even more than you need to and sell me the credits for being able to do that? That's the idea and therefore it becomes very flexible. Companies can do what makes sense for them without following a pre-prescribed set of rules developed by a set of regulators in Washington. What seems to be going on right now is that a pre-prescribed set of rules developed by regulators in Washington, seems to be the prefered direction of the Biden administration.
Rusty Braziel:
In other words, let's, don't create something with enough flexibility to let industry figure out what to do. Let's come up with a set of rules and implement that set of rules. And maybe one of these days will kick in with some price of carbon as well. This past week, Kerry had in some presentation, said something along the lines of, "Well, we're not going to do necessarily a price of carbon right now for US producers, but maybe for polluters where there's not a lot of controls in other countries that are going to import products into the United States, maybe will tag those products with a carbon duty, if you will." And therefore, it looks like maybe that's a sign that they're coming around to the fact that there's some advantages to doing it with a price of carbon, rather than just a pre-prescribed set of rules.
Josh King:
As we wrap up Rusty, every year you publish your prognostications blog which makes you really a modern day, Oracle of Delphi on all things energy. What do you think you're going to be the key trends we need to look out for in energy markets in over the next 12 months?
Rusty Braziel:
For each markets it's different. So when I do those product applications, I cross all the energy commodities, but I look at each of the energy commodity markets as to what specifically is going on there. In terms of oil markets, let's face it, it's really all about OPEC Plus. OPEC right now has a lot of volume taken off the market. If that volume was not taken off the market, crude oil prices in the Permian base would not be at 60 bucks. So what we have to look at is the whole politics around Russia, Saudis, what's going on with OPEC and how those companies end up responding to what's happening in the market and what will happen in the market between now and the end of the year. We also have to pay a lot of attention to the pace of COVID reopening. Lot of optimist out there that think that COVID reopening is happening.
Rusty Braziel:
We're going to all be going to be flying and going to baseball games and everything's going to be just the way it was. Nobody wears any masks and things are good, but as we can see from India, sometimes it doesn't always work out that way. And so over the next six months, we'll learn how that's going play out. And I hope by the time I get to the prognostications blog, I have a little bit more insight on both of those two scenarios that we're talking about now. Gas, it's all about LNG and whether or not gas production can keep up with it. One of the things we haven't talked about is the fact that crude production is down like 13, 14%, but natural gas production is hardly down at all. You say why that seems odd. Why would that be? And the reason is because for every crude oil molecule that comes out of the ground, more gas comes out of the ground today, then came out of the ground two years ago, the gas to oil ratio is increasing.
Rusty Braziel:
If that keeps happening, we got enough gas for LNG exports. If that doesn't keep happening, then we might not. And what that would mean is if you took out that propane tank and replaced it with a natural gas connection, then you might be paying a lot more for your natural gas. Finally, we already talked about situation for propane and all of those things, just like we had said in the domino effect, they all bounce off each other. So if gas goes up, that's going to affect how much gas is used for generating electricity. Generating electricity is going to impact the coal markets. Everything is tied to together. And that's what that blog's really all about every year.
Josh King:
Well, Rusty, I hope we've been able to workshop in real time, a couple things for both the prognostications blog and also your update and sequel to the domino effect. And it has been a great tour around the world of energy markets with you. And I'm going to take your leave now, go grab a couple cans of yellow paint and paint up that propane tank because it ain't going anywhere my friend. Thank you so much for joining us Inside the ICE House.
Rusty Braziel:
Well thank you, Josh. It's great being here.
Josh King:
And that's our conversation for this week. Our guest was Rusty Braziel, CEO and Principal Energy Markets Consultant for RBN Energy. If you like, what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a question or comment, you'd like one of our experts to tackle like Rusty on a future show, email us at [email protected] or tweet at us @ICEHousePodcast. Our show is produced by [Emily Labar 00:51:53], Pete Asch, and [Veronica Slumpco 00:51:55] with production assistance from Ian Wolf. I'm Josh king, your whole host signing off from the library of the New York Stock Exchange. Thanks for listening. And we will talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor is affiliates make any representations or warranties express or implied as to the accuracy or completeness of the inform and do not sponsor, approve or endorse any of the content hearing. All of which is presented solely for informational and educational purposes. Nothing here in constitution offered to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of link or clarity.
