Oil & Gas Prices - July 7

[dan_s]

Susan & I are back from two relaxing days in Lake Charles.

Opening Price:
> WTI is up $0.20 to $72.00/bbl, and Brent is up $0.23 to $76.75/bbl. < At 1:30PM CT WTI is up $1.94 to $73.74/bbl.
> Natural gas is up 1.7c to $2.626/MMBtu. < At 1:30PM CT HH natural gas is down $0.03 to $2.58/MMBtu

AEGIS Notes
Oil

Oil heads for a second consecutive weekly gain as supply concerns offset demand fears < In the real "Fundamental World" demand for oil-based products now exceeds supply by ~2 million bpd and likely heading to a deficit over 2.5 million bpd once the full impact of the Saudi's export cuts ripple through the market.
> Equities trade lower, and the dollar weakened, making commodities priced in USD less expensive for holders of other currencies
> Saudi Arabia and Russia announced new output cuts this week, taking total OPEC+ reductions to around 5 MMBbl/d in August < Since we now know that most of the OPEC cartel members cannot produce up to their old quota, the OPEC+ actual production capacity that is offline today is actually closer to 2.0 million bpd.
> Yet, expectations of a likely U.S. Fed rate hike at the July 25 meeting, potentially weighing on oil demand, capped oil price gains

Saudi Arabia Hikes Its Oil Prices as Supply Cuts are Extended (Bloomberg)
> Saudi hikes oil prices by 80c to northwest Europe, $1.00-$1.10 for the Mediterranean, and 20c for Asia's Arab Light oil, with Asia accounting for 60% of the kingdom’s market
> The nation has also extended its unilateral 1 MMBbl/d supply cut into August
> Following the price hikes and output cuts, some buyers in Asia and Europe plan to cut Saudi oil purchases, potentially tightening the physical market as they seek alternatives

Deflation Hits US Shale Oil Fields, Easing Cost Pressure on Energy Companies (Bloomberg) < Good news for all of the upstream companies in our model portfolios.
> US oil fields witness a substantial drop in production costs, with drill pipe prices and daily rig rates down by 50% and over 10%, respectively, and steel and diesel prices also declining
> 2Q2023 saw a 1% drop in US oil production costs, the first drop in three years, with forecasts of a 10% decrease next year, says Goldman Sachs
> Lower costs will likely drive companies to cut budgets, not boost drilling, as they aim to maintain output while trimming capital spending by 5%-10% next year, according to JP Morgan < U.S. oil production growth WILL NOT HAPPEN at the current oil price. All of the public companies are committed to live within operating cash flow, with debt repayment, dividends and stock repurchases their priorities.
> These cost savings are expected to help mitigate reduced free cash flow, with potential decreases in share buybacks and dividends and a renewed focus on cost reductions.

Natural Gas

Natural gas prices are trading slightly higher but heading for a weekly loss
> The Winter ‘23/’24 strip is trading $3.51, and the Summer ’24 strip is at $3.29
> The EIA will release its weekly natural gas storage report today, with a median analyst expectation of 65-Bcf, while the Bloomberg survey ranges from 56-Bcf to 73-Bcf < Per EIA: "Working gas in storage was 2,877 Bcf as of Friday, June 30, 2023, according to EIA estimates. This represents a net increase of 72 Bcf from the previous week. Stocks were 575 Bcf higher than last year at this time and 366 Bcf above the five-year average of 2,511 Bcf. At 2,877 Bcf, total working gas is within the five-year historical range."

LNG Canada preparing for commissioning and startup (Reuters)
> On Thursday, project developers discussed the timeline for Canada’s first LNG export facility, saying that it is 85% complete and on track to begin shipments in 2025 and start taking gas in 2024
> Phase 1 of the facility will have a capacity of 1.85-Bcf/d, and the planned Phase 2 would increase the capacity to 3.75-Bcf/d
> Developers are planning for the facility’s second phase to be electric-powered rather than natural gas and are in “encouraging” talks with BC Hydro to secure the power and electrical infrastructure needed
> CEO Jason Klein said, "There's a long way to go before BC Hydro is ready to talk to any of the industry players in the northwest about how that infrastructure could be built and funded and what the costs would look like,"

Forecasters raise hurricane outlook (Reuters)
> Forecasters at CSU have raised their 2023 hurricane season outlook for the second time this year due to ocean temperatures reaching record highs
> Oftentimes, the presence of the El Nino weather phenomenon would reduce the number of hurricanes; however, forecasters said that the warmer waters are offsetting the El Nino effect
> Hurricanes pose a net-bearish risk to natural gas, with the majority of US LNG export facilities located along the gulf coast and the Gulf of Mexico only producing about 2-Bcf/d

[dan_s]

Closing Prices:
> Prompt-Month WTI (Aug 23) was up $2.06 on the day, to settle at $73.86
> Prompt-Month Henry Hub (Aug 23) was down $-0.027 on the day, to settle at $2.582

Fear of Recession is fading and the reality that oil demand exceeds supply is sinking in.