Oil & Gas Prices - Dec 1

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LONDON (Reuters) - Oil prices rallied on Wednesday after recent sharp drops as major producers started to discuss future output against the backdrop of the Omicron variant of the coronavirus triggering fresh travel restrictions which could dampen oil demand.

Equity markets, which often move in tandem with oil prices also rebounded as investors bought the previous session's dip in the hope that Omicron would not derail an economic recovery.

Brent crude futures for February rose $2.10, or 3%, to $71.33 a barrel at 1331 GMT.

U.S. West Texas Intermediate (WTI) crude futures rose $1.91, or 2.9%, to $68.09 a barrel. Both contracts retraced some of their gains after an OPEC+ document showed the group forecasts a bigger oil surplus in the new year. < IMO this is just "cover" for OPEC+ to halt their production increases for a few months since over half of the countries in the cartel are already at max capacity.

Both Brent and WTI front-month contracts in November posted their steepest monthly falls in percentage terms since March 2020, down 16% and 21% respectively.

The Organization of the Petroleum Exporting Countries started a meeting around 1320 GMT, ahead of a meeting on Thursday of OPEC+, which groups OPEC with allies including Russia.

Some analysts expect OPEC+ to pause plans to add 400,000 barrels per day of supply in January.

OPEC+ sees the oil surplus worsening to 2 million barrels per day (bpd) in January, 3.4 million bpd in February and 3.8 million bpd in March next year, an internal report seen by Reuters showed. < Oil demand is seasonal and it always declines a bit after the holidays. The HIGH DEMAND period for oil is May to September.

"There is much to suggest that OPEC+ will not initially step up its oil production any further in an effort to maintain current prices at around $70/bbl," PVM analyst Stephen Brennock said.

"OPEC+ have erred on the side of caution since it began slowly boosting supplies and a decision to shelve a planned increase output in January and keep its quota flat comports with its cautious approach."

Several OPEC+ ministers, though, have said there was no need to change course.

But even if OPEC+ agrees to go ahead with its planned supply increase in January, producers may struggle to add that much.

A Reuters survey found OPEC pumped 27.74 million bpd in November, up 220,000 bpd from the previous month, but that was below the 254,000 bpd increase allowed for OPEC members under the OPEC+ agreement.

Data from the American Petroleum Institute industry group showed U.S. crude stocks fell by 747,000 barrels in the week ended Nov. 26, according to market sources, a smaller decline than expected.

Government stockpile data is due at 1530 GMT. [EIA/S]

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Opening Prices:
> WTI is up $1.90 to $68.08/Bbl, and Brent is up $2.07 to $71.30/Bbl.
> Natural gas is down 13.9c to $4.428/MMBtu.

AEGIS Notes
Oil

Oil prices rebounded Wednesday morning from another sharp dip in prices yesterday
> OPEC and their allies are set to meet tomorrow to discuss their supply policy amid wild volatility
> Omicron variant uncertainty has been the main driver pressuring oil prices, but the prospects for a faster tapering of stimulus by the U.S. Federal reserve contributed to the price decline on Tuesday

The options markets have moved more bearish and showed signs of stress, with Brent and WTI volatility both climbing to the highest since May 2020 (BBG)
> Put skews also steepened, with Brent at its highest since April 2020 and WTI’s since May 2020
> Both benchmarks closed below their 200-day moving average for the first time in about a year as of Tuesday
> AEGIS notes that heavy put skew can make costless collars less attractive as buying the put becomes more expensive and the sold call is worth relatively less

Natural Gas

The prompt-month (Jan ’22) contract is down by 13.9c at $4.428
> U.S. gas prices had their worst November in over 20 years, (rolling prompt) losing 85c or 15.83%, to finish at $4.567, its lowest settle since August
> The March-April spread, also known as the “widowmaker”, which serves as a proxy for how tight traders are expecting inventories to be at the end of winter, narrowed to 34.6c, its lowest since April
> Weather runs continued to disappoint, with the December gas-weighted heating degree day forecast total posting its largest loss yet at 23.7 HDDs, bringing the total forecast to 752, also a new low
> Production is down again at 93.6 Bcf/d, bringing the loss total since Monday to 2.4 Bcf/d

Italy minister warns of European blackouts as prices continue to rise
> “Given the current energy supply system, a blackout cannot be ruled out” in Europe, Minister Giancarlo Giorgetti said in Rome on Tuesday
> European electricity prices have broken records, while the region faces a new surge in COVID cases. The problem is exacerbated by inflation as households budgets are squeezed
> EU energy ministers are expected to meet in Brussels to discuss the energy crunch and possible subsidies to ease the impact of record electricity prices
Europeans are being taught a valuable lesson: "You cannot force a decline of the reliable energy sources (oil, gas, coal and nuclear) and replace them with unreliable energy sources (wind & solar)."