Energy Prospectus

Opening Prices:
> WTI is up 59c to $52.84/Bbl, and Brent is up 72c to $56.38/Bbl.
> Natural gas is up 11.6c to $2.863/MMBtu. < We are one tiny Polar Vortex away from $3.00 gas.

Aegis Morning Notes:
Crude Oil

Oil reaches new ten-month high during this morning’s trading session
The dollar index (DXY)reversed yesterdays gains, losing an additional ten pips to trade near $90.464
OPEC+ compliance reaches its lowest since the latest round of supply cuts began last May

Heavy Canadian crude grades surge on supply outage suspicions (Bloomberg)
Western Canadian Select Basis (WTI @ Cushing) pricing tightened by $1.35/Bbl, to $13.40/Bbl, its highest since December

Kansas City Fed survey shows drilling activity was up in 4Q2020. The drilling and business activity index reported by the fed jumped from 4 in 3Q2020 to 40 in 4Q2020 as producers become more optimistic about the impact of a successful vaccine rollout on oil markets
The CapEx index jumped from -14 to 9 in 4Q2020

Natural Gas

Natural gas flowing into U.S. LNG facilities remains near capacity as spot prices for deliveries to Northeast Asia approach a whopping $30/MMBtu (Platts)
The JKM benchmark hit its record high spot price of $30 only nine months after reaching a record low
AEGIS notes that JKM futures for April to December 2021 are lower at around $7/MMBtu
The acute cold in Asia and astronomical shipping cost, due to low availability of LNG specific vessels, have contributed to January and February JKM prices soaring

Weather forecasts show a gain of 5.7 gas weighted HDDs (~10 bcf) in the past 24-hours as cooler temperatures spread across the Great Plains, Texas and Southeast U.S. (CWG)
January currently ranks on the warmer side for the past 20 years in terms of total heating degree days (HDDs) – a measure of demand
Commodity Weather Group (CWG) has January pegged at about 875 HDDs including current forecasts, about 40 HDDs less than the 10 year normal and 80 HDDs less than the 30 year normal
The meteorologist allot a 60 HDD spread range from about 840 (still a top ten warm month) to 900 on the high side for January
For reference, the coldest January in the past 20 years was 2014 at about 1040 HDDs and the warmest was 2006 at about 715 HDDs
MY TAKE: Everyone that works at a national weather service MUST BE A "CLIMATE CHANGE" BELIEVER if they hope to keep their job. Their forecast bias is always warm and not a mention of the record cold winter this year in Europe and Asia.

Tudor Pickering Holt morning note:
"US Gas Macro Update: From Hokkaido to Henry; Upgrading AAV CN, AR, BIR CN, RRC & SWN to Buy From Hold; US Gas: Time to Buy Beta; Good Times Ahead For CAD Gas."

US Gas Macro Report – Hokkaido to Henry
Henry Hub to push through $3.25 on higher LNG utilization
Sector: Macro | Ticker: HHUB | Recommendation: NA | Target: NA | Close: $2.79/mmbtu
Unexpected tightness in the LNG market is sending shockwaves around the world and while Henry Hub is limited in its ability to participate in the current rally, the aftershocks are expected to drive US prices north of $3.25/mmbtu this summer and $3.50/mmbtu by year-end.
Extreme cold in Asia combined with ~7% of LNG supply being offline for various reasons has led to record imports and prices in the major Asian markets. The knock-on of this is all flexible cargoes are being directed to Asia and, as a result, European LNG imports are down ~5bcfd year-over-year and accelerating. With Europe relying on storage to plug the gap, we forecast European storage drawing down to 1.15tcf by the end of winter, 10% below the 5-year average and an impressive ~900bcf below last year. But the final ripple in this chain of events is higher US LNG utilization as we expect Europe to import record volumes over the summer to replenish storage levels. We see the call on US LNG being 10.1bcfd through Q2 & Q3, equal to ~92% utilization. Without a pricing response, we see this driving peak storage in the US down to 3.2tcf (-14% vs. 5-yr), putting storage in a precarious position heading into next winter. As a result, we expect prices to rise to $3.25 by the summer and $3.50 by year-end in order to incentivize sufficient gas to coal switching and normalize storage levels around the 5-year average. Lastly, even with associated growth back in the picture, if gas directed growth can be limited to 1bcfd (~2%), we think $3.25 could be here to stay through 2023.

US Gas: Time to Buy Beta
Shift in global fundamentals warrants owning beta exposure over the next twelve months
Sector: NAm E&P | Ticker: NA | Recommendation: NR | Target: NA | Close: NA
Our cautious stance on natural gas, which previously called for 2021 strip to average $2.70/mcf, has turned decidedly bullish as the shift in global gas balances will likely cause a vicious rally in Henry Hub pricing over the next six months. This combined with our constructive call on Brent, reaching $60/bbl in H2’21, will provide a significant tailwind to beta oriented gas equities with both gas and NGL exposure heading into 2022. Yes the names have run, and no they don’t look attractive at strip, but given our conviction on upside to H2’21+ gas and a constructive NGL backdrop, we expect the compression of leverage metrics and absolute debt reduction to translate into material equity price appreciation. For the group as a whole, if we underwrite $55 WTI and $3.25 gas in 2022/23 we see the average leverage metrics falling from 1.9x in 2021 to 0.6x by 2023 with 2023 FCF to equity improving from 10% to 23% on average and 2023 FCF to EV moving from 6% to 17%. See comments about AR, RRC and SWN under the Sweet 16 heading on the EPG Forum.

ScotiaBank
In the first week of the year, we witnessed the start-up of Kinder’s Permian
Highway Pipeline (PHP), a 2.1 bcf/d project, moving volumes to the Gulf Coast and
Mexico markets. In the same week, Mexican exports rose +0.6 bcf/d week over week
(w/w), or 11%, to 6.1 bcf/d. Spot pricing in Asia continues to be notable, supporting
LNG feedgas flows of 11.2 bcf/d. JKM was up 25% w/w to average $15.71 and set new
record highs (see our recent JKM comment). The NGL barrel was up 3% w/w (+23%
year over year [y/y]), with a 10% rise in both ethane and propane, now collectively 64%
higher y/y, offset partially by a 22% decline in n-butane.

Closing Prices:
> WTI prompt month (FEB 21) was up $0.96 on the day, to settle at $53.21/Bbl.
> Also, NG prompt month (FEB 21) was up $0.006 on the day, to settle at $2.753/MMBtu.

I think WTI may be getting ahead of itself. I do think WTI is heading back to the "Right Price" of $65/bbl, but not until we work off more inventory and call an end to the Pandemic. Tighten up your stop loss orders or sell some covered calls. I am terrible at market timing, so maybe you should ignore this advice.

Anyway, "They call them cycles for a reason" and this one is going to over-shoot the mark. Maybe by a wide margin.