Opening Prices:
> WTI is up 30c to $71.95/Bbl, and Brent is up 27c to $73.74/Bbl.
> Natural gas is up 3.9c to $3.653/MMBtu.
AEGIS Notes
Crude Oil
WTI is headed for the biggest weekly loss in four months amid an uncertain oil demand outlook due to a resurgence of Covid-19
> Oil traded below $72/Bbl Friday morning and could be headed for a weekly decline of nearly 3.5%
> The delta variant is triggering renewed restrictions on movement as it becomes the dominant covid strain around the globe
> The UAE and Saudi Arabia have reached a compromise that could give the Emirates a more generous output limit next year and allow the whole OPEC+ group to pump more oil in the coming months (Bloomberg). MY TAKE: If it is confirmed that UAE's production quota will not be increased until next year, the traders should see this deal as bullish news. Per IEA's July Oil Market Report, the global oil market will need all of OPEC's production capacity online by next summer anyway.
The amount of backwardation in both the Brent and WTI curves relaxed this week as prices have slumped
> WTI’s August-September spread backwardation retreated 22c to +27c/Bbl on Thursday; the weakest close for the prompt spread since June 22
> The reduction in backwardation can be perceived as a bearish price signal indicating that concerns about supply tightness are fading (Bloomberg)
Keep in mind that "backwardation" in the NYMEX strip is BULLISH because it means (a) refiners are worried about not having enough feedstock NOW and (b) it discourages producers from sending oil to storage. The NYMEX strip is not a forecast. Think of the contracts as Calls and Puts on oil for delivery in the future.
Natural Gas
The prompt-month (August ’21) contract is up by 3.9c, after posting three consecutive daily losses
> EIA reported a build of 55 Bcf for the week ending 7/09/2021, which was larger than the median estimate of 49 Bcf
> Inventories for the U.S. are now at a deficit of 543 Bcf to last year and a deficit of 189 Bcf to the five-year average
The historic drought affecting the U.S. West is expected to persist through October (NOAA)
> The drought is now affecting 95% of the land in 11 western states and has caused over $1 billion in damages
> According to the National Oceanic and Atmospheric Administration’s (NOAA) monthly report, the U.S. West is expected to continue to see abnormally warm temperatures and a dearth of rainfall through October
> The drought has caused capacity to be reduced at several hydropower plants and served as a bullish catalyst for gas prices as it opens up additional room in the power stack for gas
Prices for delivered LNG in both Europe and Asia remain very high. Dutch TTF is $12.06/MMBtu and Japan/Korea is $12.98/MMBtu. < As long as the profit margin for LNG is this high, there is zero chance of U.S. gas in storage getting back to the 5-year average by November.
Oil & Gas Prices - July 16
Oil & Gas Prices - July 16
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil & Gas Prices - July 16
Reuters: OPEC sees world oil demand reaching pre-pandemic level in 2022
OPEC forecast on Thursday that world oil demand would rise in 2022 to reach a level similar to before the pandemic, led by growth in the United States, China and India. The Organization of the Petroleum Exporting Countries said in its monthly report that demand next year would rise by 3.4% to 99.86 million barrels per day (bpd), and would average more than 100 million bpd in the second half of 2022.
Wood Mackenzie: Is the world sleepwalking into an oil supply crunch? Wood Mackenzie
Opinion. Under-investment in oil supply will lead to a tight oil market later this decade. It’s a narrative that’s gained increasing traction as capital expenditure on upstream oil and gas has shrunk. Spend in 2021 is half the peak of 2014 after slumping to new depths in last year’s crisis. I asked Harry Paton of our Oil Supply team and Ann Louise Hittle, Head of Macro Oils, how they see the medium-term market fundamentals developing and the implications for price.
How much new oil supply does the world need? A lot - we reckon about 20 million barrels per day (b/d) from 2022 to 2030. This is the "supply gap", the difference between our estimate of demand in 2030 and the volumes we forecast existing fields already onstream or under development can deliver.
Fleshing that out, we expect oil demand to grow from 2022 to 2030, rising by just under 7 million b/d. The rate of growth, though, slows through the period to less than 0.5 million b/d a year by 2030. Non-OPEC onstream supply falls by 13 million b/d over the same period. This is mainly a function of the natural decline of mature assets in big producing countries including the US, China, Russia and Norway.
Where will new supply come from and at what cost? The supply is there to fill the gap to 2030. Most of the 20 million b/d will come from non-OPEC sources. Around 16 million b/d has relatively low cost, breaking even below US$60/bbl – predominantly reserves growth from developed fields, US Lower 48 drilling and pre-FID projects. The remaining 4 million b/d is mostly from the same sources but higher cost with break-evens ranging from US$60/bbl to US$80/bbl. Other non-OPEC sources also contribute some volumes, including yet-to-find, biofuels, CTL, GTL, oil shale and technical discoveries.
Our forecasts suggest net OPEC supply growth from 2022 to 2030 is modest. Volume increases for Middle East countries partly offset declines in maturing countries including Nigeria, Angola and Algeria.
What are the implications for OPEC? OPEC’s market share has fallen substantially over the last decade, from just under 40% in 2010 to 30% last year. The ascent of US tight oil through the decade was a big factor, while the pandemic forced OPEC to materially curtail supply in 2020.
The immediate priority for OPEC and its partners in OPEC+ is to balance the market as demand recovers. We expect OPEC will be able to increase volumes progressively through to end 2022. But the scope is more limited in the years beyond, unless global liquids demand surprises on the upside. On our forecasts, OPEC’s market share doesn’t increase much above 32% to 33% for much of the coming decade.
What does it mean for prices? There are three main drivers behind our forecast for Brent to rise to US$80/bbl (real) later this decade. First, the fundamentals – a price of US$80/bbl is needed to incentivise investment in the higher cost barrels to meet increased demand through to 2030.
Second, limited ‘available’ OPEC spare capacity leaves the market vulnerable to supply disruption. Political risks (Nigeria, Libya) or sanction risks (Iran and Venezuela) threaten to restrict OPEC’s theoretical spare capacity to a more modest ‘available’ capacity of 4 million b/d or 4% of global demand.
Third, there’s OPEC strategy. Current firm prices are helping OPEC to maximise income and recoup revenue ‘lost’ last year. But higher prices incentivise non-OPEC investment at the margin and run the risk of limiting OPEC’s own scope for material future volume increases beyond 2022.
It’s starting to happen in the US. Tight oil’s recovery this upcycle is much more sluggish than previous ones, with publicly listed operators holding the line on capital discipline. Even so, the US Lower 48 rig count has doubled in 10 months from the August 2020 low mainly because private companies, freer of stakeholder ‘stay-flat’ shackles, are spending more. It’s only just enough to keep production static in 2021.
That will change. We expect the rig count in the Permian, the main focus of new drilling, to rise by another 80% in the next 18 months. Higher production will follow. We forecast US Lower 48 production will grow by 2 million b/d from 2022 to 2030 based on Brent steadily increasing to US$80/bbl (real).
OPEC, and Gulf producers in particular, hold much of world’s lowest cost undeveloped resource. Our analysis suggests the world becomes increasingly reliant on these barrels after 2030 as non-OPEC production plateaus and then declines. This decade though looks more challenging for OPEC as a whole to increase its market share if prices stay at current levels or higher.
Once demand has recovered from the crisis and the market has rebalanced, OPEC may find it can’t have its cake and eat it.
OPEC forecast on Thursday that world oil demand would rise in 2022 to reach a level similar to before the pandemic, led by growth in the United States, China and India. The Organization of the Petroleum Exporting Countries said in its monthly report that demand next year would rise by 3.4% to 99.86 million barrels per day (bpd), and would average more than 100 million bpd in the second half of 2022.
Wood Mackenzie: Is the world sleepwalking into an oil supply crunch? Wood Mackenzie
Opinion. Under-investment in oil supply will lead to a tight oil market later this decade. It’s a narrative that’s gained increasing traction as capital expenditure on upstream oil and gas has shrunk. Spend in 2021 is half the peak of 2014 after slumping to new depths in last year’s crisis. I asked Harry Paton of our Oil Supply team and Ann Louise Hittle, Head of Macro Oils, how they see the medium-term market fundamentals developing and the implications for price.
How much new oil supply does the world need? A lot - we reckon about 20 million barrels per day (b/d) from 2022 to 2030. This is the "supply gap", the difference between our estimate of demand in 2030 and the volumes we forecast existing fields already onstream or under development can deliver.
Fleshing that out, we expect oil demand to grow from 2022 to 2030, rising by just under 7 million b/d. The rate of growth, though, slows through the period to less than 0.5 million b/d a year by 2030. Non-OPEC onstream supply falls by 13 million b/d over the same period. This is mainly a function of the natural decline of mature assets in big producing countries including the US, China, Russia and Norway.
Where will new supply come from and at what cost? The supply is there to fill the gap to 2030. Most of the 20 million b/d will come from non-OPEC sources. Around 16 million b/d has relatively low cost, breaking even below US$60/bbl – predominantly reserves growth from developed fields, US Lower 48 drilling and pre-FID projects. The remaining 4 million b/d is mostly from the same sources but higher cost with break-evens ranging from US$60/bbl to US$80/bbl. Other non-OPEC sources also contribute some volumes, including yet-to-find, biofuels, CTL, GTL, oil shale and technical discoveries.
Our forecasts suggest net OPEC supply growth from 2022 to 2030 is modest. Volume increases for Middle East countries partly offset declines in maturing countries including Nigeria, Angola and Algeria.
What are the implications for OPEC? OPEC’s market share has fallen substantially over the last decade, from just under 40% in 2010 to 30% last year. The ascent of US tight oil through the decade was a big factor, while the pandemic forced OPEC to materially curtail supply in 2020.
The immediate priority for OPEC and its partners in OPEC+ is to balance the market as demand recovers. We expect OPEC will be able to increase volumes progressively through to end 2022. But the scope is more limited in the years beyond, unless global liquids demand surprises on the upside. On our forecasts, OPEC’s market share doesn’t increase much above 32% to 33% for much of the coming decade.
What does it mean for prices? There are three main drivers behind our forecast for Brent to rise to US$80/bbl (real) later this decade. First, the fundamentals – a price of US$80/bbl is needed to incentivise investment in the higher cost barrels to meet increased demand through to 2030.
Second, limited ‘available’ OPEC spare capacity leaves the market vulnerable to supply disruption. Political risks (Nigeria, Libya) or sanction risks (Iran and Venezuela) threaten to restrict OPEC’s theoretical spare capacity to a more modest ‘available’ capacity of 4 million b/d or 4% of global demand.
Third, there’s OPEC strategy. Current firm prices are helping OPEC to maximise income and recoup revenue ‘lost’ last year. But higher prices incentivise non-OPEC investment at the margin and run the risk of limiting OPEC’s own scope for material future volume increases beyond 2022.
It’s starting to happen in the US. Tight oil’s recovery this upcycle is much more sluggish than previous ones, with publicly listed operators holding the line on capital discipline. Even so, the US Lower 48 rig count has doubled in 10 months from the August 2020 low mainly because private companies, freer of stakeholder ‘stay-flat’ shackles, are spending more. It’s only just enough to keep production static in 2021.
That will change. We expect the rig count in the Permian, the main focus of new drilling, to rise by another 80% in the next 18 months. Higher production will follow. We forecast US Lower 48 production will grow by 2 million b/d from 2022 to 2030 based on Brent steadily increasing to US$80/bbl (real).
OPEC, and Gulf producers in particular, hold much of world’s lowest cost undeveloped resource. Our analysis suggests the world becomes increasingly reliant on these barrels after 2030 as non-OPEC production plateaus and then declines. This decade though looks more challenging for OPEC as a whole to increase its market share if prices stay at current levels or higher.
Once demand has recovered from the crisis and the market has rebalanced, OPEC may find it can’t have its cake and eat it.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil & Gas Prices - July 16
This is an industry with VERY BIG NUMBERS. Let it sink in that this world will consumes over 36 BILLION barrels of oil over the next 12 months.
The Energy Report: 100 Million Barrels
By Phil Flynn
Jul 16, 2021 11:07AM ET
There is more evidence that the predictions of “peak oil demand” were greatly exaggerated. OPEC in its latest monthly report predicted that we would see global oil demand exceed 100 million barrels a day in 2022. Just think of that number. The 100-million-barrels-a-day mark is about 20 million barrels above the demand level that peak oil production believers told us we would never be able to produce. The peak demand folks that just a year ago were predicting that COVID-19 had put in place the all-time top for fossil fuel demand, have to go back to the drawing board and reconfigure their estimates. Will peak demand ever occur? The peak demand crowd is probably going to be as wrong as the peak oil production people were 20 years ago.
OPEC says that, “World oil year-over-year demand growth in 2021 is forecast at 6.0 mb/d, unchanged from last month’s assessment, although there have been some regional revisions. Total oil demand is projected to average 96.6 mb/d in 2021. The 1Q21 was revised lower, amid slower than anticipated demand in the main OECD consuming countries. This was counterbalanced by better-than-expected data from OECD Americas in 2Q 21, which is now projected to last through the 3Q 21. Solid expectations exist for global economic growth in 2022.
These include improved containment of COVID-19, particularly in emerging and developing countries, which are forecast to spur oil demand to reach pre-pandemic levels in 2022. World oil demand is anticipated to rise by 3.3 mb/d y-o-y in 2022, while total world oil demand is projected to average 99.86 mb/d, with the 100 mb/d marks exceeded in 2H22. OECD oil demand is anticipated to increase by 1.5 mb/d, as OECD Americas is expected to rise firmly with US oil demand only marginally below 2019 levels, mainly due to lagging transportation fuel demand.
Non-OECD oil demand is projected to show an increase of 1.8 mb/d, with gains in China and India exceeding pre-pandemic levels, supported by a respectable recovery in transportation fuels and firm industrial fuel demand, including petrochemical feedstock.
While these oil demand expectations are very bullish in the long run, in the short term we’ve seen one of the worst stretches for prices in a couple of months. There are many reasons. The first reason is the 4th of July peak. Many times, as we have stated before, there is a bit of a correction around the 4th of July, then consolidation, and then depending on the fundamentals, the next move higher or lower begins.
We feel very confident that the move most likely will be higher. That is mainly because U.S. oil inventories will continue to fall dramatically in the next couple of months.
Another reason we saw the oil price drop is because of the uncertainties surrounding the OPEC+ Russia agreement. While there was a lot of talk about a compromise between Saudi Arabia and the UAE, so far there is no deal. It seems that there was a disagreement as to how long they should keep this new agreement in place.
The other problem that they’re having is that other countries now are looking at the deal that the UAE is getting and they want more barrels for themselves, That leads to a larger fear for oil traders that this little dispute could blow up and end up into another oil production war.
One other reason why oil sold off is simply due to option expiration. We saw a big unwinding of some of the time spreads in oil. It seemed like we had a lot of financial jockeying going on as the clock ran out on the August options.
There was also some concern about the COVID-19 variance and whether or not that would lead to more lockdowns of the global economy, thereby putting downward pressure on demand. There were peripheral reports of slowing demand in India and China, though the trend for both of those countries seems to have demand on an upward trajectory.
We think that the oil correction phase will end soon though it might be a little choppy here for the next couple of weeks. We believe that once the reality starts setting in surrounding the tight supply situation in August, we should see this market resume its trek to new highs. You should expect to see a great opportunity to lock in hedges. So if you have an upside risk to oil prices, this might be a good opportunity to get hedged. I know I sound like a broken record when it comes to the hedging side of the equation. For the last year I continue to warn people to get hedged because of the potential upside risk in prices. Those risks have not gone away. We are facing a market that is going to be undersupplied even if OPEC does agree to raise production quotas.
Natural gas and grains are looking at the possibility of a very hot and dry stretch of weather. Top-notch weather service forecaster Bret Walts at Bamx.com says that overall, the biggest heat in the next 7-10 days will be across North Dakota, South Dakota, and Minnesota for the Ag Belt. Generally, these are the areas that have struggled the most with drought conditions. While a few areas, especially SD, may get some rain this weekend (locally heavy but not widespread) these same areas will see little moisture in the next 7-10 days or so.
Elsewhere, the Ohio Valley to the East Coast and the southern tier of the U.S. stays more seasonable to the cooler so no major spikes in cooling demand coming up. We’ll need to watch 10 days from now for some better moisture chances to return across the Midwest but whether it’s heavy or widespread enough to continue to put dents in this drought, remains to be seen.
The Energy Report: 100 Million Barrels
By Phil Flynn
Jul 16, 2021 11:07AM ET
There is more evidence that the predictions of “peak oil demand” were greatly exaggerated. OPEC in its latest monthly report predicted that we would see global oil demand exceed 100 million barrels a day in 2022. Just think of that number. The 100-million-barrels-a-day mark is about 20 million barrels above the demand level that peak oil production believers told us we would never be able to produce. The peak demand folks that just a year ago were predicting that COVID-19 had put in place the all-time top for fossil fuel demand, have to go back to the drawing board and reconfigure their estimates. Will peak demand ever occur? The peak demand crowd is probably going to be as wrong as the peak oil production people were 20 years ago.
OPEC says that, “World oil year-over-year demand growth in 2021 is forecast at 6.0 mb/d, unchanged from last month’s assessment, although there have been some regional revisions. Total oil demand is projected to average 96.6 mb/d in 2021. The 1Q21 was revised lower, amid slower than anticipated demand in the main OECD consuming countries. This was counterbalanced by better-than-expected data from OECD Americas in 2Q 21, which is now projected to last through the 3Q 21. Solid expectations exist for global economic growth in 2022.
These include improved containment of COVID-19, particularly in emerging and developing countries, which are forecast to spur oil demand to reach pre-pandemic levels in 2022. World oil demand is anticipated to rise by 3.3 mb/d y-o-y in 2022, while total world oil demand is projected to average 99.86 mb/d, with the 100 mb/d marks exceeded in 2H22. OECD oil demand is anticipated to increase by 1.5 mb/d, as OECD Americas is expected to rise firmly with US oil demand only marginally below 2019 levels, mainly due to lagging transportation fuel demand.
Non-OECD oil demand is projected to show an increase of 1.8 mb/d, with gains in China and India exceeding pre-pandemic levels, supported by a respectable recovery in transportation fuels and firm industrial fuel demand, including petrochemical feedstock.
While these oil demand expectations are very bullish in the long run, in the short term we’ve seen one of the worst stretches for prices in a couple of months. There are many reasons. The first reason is the 4th of July peak. Many times, as we have stated before, there is a bit of a correction around the 4th of July, then consolidation, and then depending on the fundamentals, the next move higher or lower begins.
We feel very confident that the move most likely will be higher. That is mainly because U.S. oil inventories will continue to fall dramatically in the next couple of months.
Another reason we saw the oil price drop is because of the uncertainties surrounding the OPEC+ Russia agreement. While there was a lot of talk about a compromise between Saudi Arabia and the UAE, so far there is no deal. It seems that there was a disagreement as to how long they should keep this new agreement in place.
The other problem that they’re having is that other countries now are looking at the deal that the UAE is getting and they want more barrels for themselves, That leads to a larger fear for oil traders that this little dispute could blow up and end up into another oil production war.
One other reason why oil sold off is simply due to option expiration. We saw a big unwinding of some of the time spreads in oil. It seemed like we had a lot of financial jockeying going on as the clock ran out on the August options.
There was also some concern about the COVID-19 variance and whether or not that would lead to more lockdowns of the global economy, thereby putting downward pressure on demand. There were peripheral reports of slowing demand in India and China, though the trend for both of those countries seems to have demand on an upward trajectory.
We think that the oil correction phase will end soon though it might be a little choppy here for the next couple of weeks. We believe that once the reality starts setting in surrounding the tight supply situation in August, we should see this market resume its trek to new highs. You should expect to see a great opportunity to lock in hedges. So if you have an upside risk to oil prices, this might be a good opportunity to get hedged. I know I sound like a broken record when it comes to the hedging side of the equation. For the last year I continue to warn people to get hedged because of the potential upside risk in prices. Those risks have not gone away. We are facing a market that is going to be undersupplied even if OPEC does agree to raise production quotas.
Natural gas and grains are looking at the possibility of a very hot and dry stretch of weather. Top-notch weather service forecaster Bret Walts at Bamx.com says that overall, the biggest heat in the next 7-10 days will be across North Dakota, South Dakota, and Minnesota for the Ag Belt. Generally, these are the areas that have struggled the most with drought conditions. While a few areas, especially SD, may get some rain this weekend (locally heavy but not widespread) these same areas will see little moisture in the next 7-10 days or so.
Elsewhere, the Ohio Valley to the East Coast and the southern tier of the U.S. stays more seasonable to the cooler so no major spikes in cooling demand coming up. We’ll need to watch 10 days from now for some better moisture chances to return across the Midwest but whether it’s heavy or widespread enough to continue to put dents in this drought, remains to be seen.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil & Gas Prices - July 16
Closing Prices:
> WTI prompt month (AUG 21) was up $0.16 on the day, to settle at $71.81/Bbl.
> NG prompt month (AUG 21) was up $0.060 on the day, to settle at $3.674/MMBtu.
WTI dropped to $70.42 in the morning and rebounded sharply. Shorts harvesting their gains for the week.
My valuations all assume that WTI averages $70/bbl and HH gas averages $3.30 in Q3, so we are ahead of schedule.
> WTI prompt month (AUG 21) was up $0.16 on the day, to settle at $71.81/Bbl.
> NG prompt month (AUG 21) was up $0.060 on the day, to settle at $3.674/MMBtu.
WTI dropped to $70.42 in the morning and rebounded sharply. Shorts harvesting their gains for the week.
My valuations all assume that WTI averages $70/bbl and HH gas averages $3.30 in Q3, so we are ahead of schedule.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group