Energy Prospectus

Today's EPG webinar starts at 11AM CT

Opening Prices:
> WTI is up $0.92 to $60.39
> Natural gas is up $0.093 to $3.005

Closing Prices at noon: with very light trading because of the holiday
> WTI closed $0.66 higher at $60.12/bbl
> Natural gas closed $0.097 higher at $3.009. For the next twelve months (APR21 to MAR22) the strip for HH gas averages $3.079/MMBtu. BIG DRAWS from storage the next two weeks should push 2H 2021 gas prices much higher because FEAR of not being able to refill storage before next winter will cause a bidding war between utilities that are paying a big premium to keep the residential gas lines filled this week. Bidding wars for physical supply are the cause of all big spikes in gas prices.

Well Freeze Offs
Bloomberg: Cold Weather Cuts Permian Oil Output by 1 Million Barrels a Day

Permian oil production has plunged by as much as one million barrels a day as the coldest weather in 30 years brings havoc to a region that seldom faces frigid Arctic blasts.

Oil traders and company executives lifted their estimate of supply losses in the region as the temperature in Midland, the capital of the Permian basin, dropped to -1 Fahrenheit (-18 Celsius), the lowest since 1989, according to the U.S. National Weather Service. Traders had previously estimated losses at several hundred thousands barrels per day.

The supply hit is expected to be short-lived, as temperatures are due to start recovering on Tuesday.

“Loss of U.S. production looks substantial,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC.

The Permian oil outage helped to push West Texas Intermediate, the crude benchmark in the U.S., above $60 a barrel for the first time in more than a year. The shape of the oil market curve also stepped up, a condition known as backwardation that denotes market tightness. The prompt backwardation in WTI reached as much as 25 cents per barrel, the widest since May.

Texas and New Mexico, home of the Permian region, produce about 5.8 million barrels a day in normal circumstances, about half of the country’s total crude output, according to data from the U.S. Energy Information Administration.

The current losses are due to a combination of well shutdowns, flow-line outages, and disrupted road transport, all due to the extreme cold weather. Small Permian producers pick up crude every few days using trucks, but bad weather is making it hard for vehicles to get out, forcing companies to close wells.

While oil production continues in many regions despite the cold, including the Bakken basin in North Dakota, the kit used in the Permian isn’t built to withstand extremely low temperatures, executives said. For example, flow lines, which link individual wells to gathering centers, are laid overground, rather than buried, as in colder regions.

The low temperatures have already caused equipment failures at multiple natural gas processing plants in the Permian basin and in the Anadarko basin in Oklahoma, sending regional natural gas prices to record highs.

From London: By FxPro Financial Services Ltd (Alexander Kuptsikevich) Feb 15, 2021 08:05AM ET
Brent prices surpassed the $63 mark in early trading on Monday, bringing this month's growth to 15%. Middle East geopolitical tensions drove the latest impulse.

The Saudi-led coalition in Yemen said it had intercepted a drone of the Iranian-backed Husit group. Differences between Iran and Saudi Arabia have faded in recent months due to a coordinated effort to maintain oil prices.

Brent is currently worth about as much as it was at the end of January 2020, when reports of coronavirus in China began to have a visible effect on the market. The price level has thus already fully recovered. Simultaneously, production volumes are about 10% lower than a year ago, as there is usually 4-9 months between drilling and supply.

Oil has risen too high too fast and could considerably slow down further global recovery. Therefore, it is in the interest of the big oil demanding countries (including the US) not to force a transition to new energy, but to be on the "cheap fuel" side. < MY TAKE: Team Biden won't do anything to help U.S. oil producers. The result will be less supply and higher fuel prices.

The strong oil price impulse is also confirmed by the extremely high RSI, which now rises to 80 on daily charts. The last time the RSI was so high was in February 2012 when Brent reached $125 but then gradually lost its growing momentum and, after a month of hovering, turned back to decline and not did reach those values again.

It is unlikely that the outcome will be as dramatic this time. However, a correction from the $63-$65 area is imminent and could be quite deep and painful for short-term traders.

America
US markets are closed today for Presidents' Day, ironically two-days after the second impeachment of former President Trump failed to secure the necessary votes to convict. With the impeachment trial over, the focus shifts back to the confirmation process and the fiscal stimulus. The Biden administration is still talking with 10 GOP Senators to see if there is sufficient common ground to have a bipartisan package. However, the Democrats have made clear that they are prepared to use the reconciliation process, which has been used by the last few presidents, to pass a large stimulus bill. The risks, such as inflation, arguably can be managed. However, what may prove more difficult to manage is the appetite for a large infrastructure initiative, which is expected to follow the stimulus package. Separately, a winter storm has knocked out power for the equivalent of two million homes in Texas and taken off capacity of around one million barrels.

After today's holiday, the US economic diary is chock full this week. The highlights include January retail sales and industrial production figures. An early look into this month's activity comes in the way of the Empire State Manufacturing Survey, the Philadelphia Fed survey, and the preliminary PMI. The FOMC minutes from last month's meeting are due in the middle of the week, and no fewer than nine Fed officials speak this week. Arguably, with the rise in nominal rates being driven by an increase in inflation expectations, which the Federal Reserve encouraged by adopting the average inflation target, it cannot be surprised or disappointed with investors' reaction function.

Canada's data highlights this week include January CPI on Wednesday and December retail sales on Friday. While the month-over-month increase in CPI (~0.5%) may be offputting, the year-over-year rate may tick up to 0.9% from 0.7%, and the underlying measures are likely to be broadly stable. Retail sales are expected to have fallen by around 2.5% after rising 1.3% in November. Mexico has a light economic calendar this week. However, the market is still digesting the implication of last week's 25 bp rate cut. The Deputy Governor of the central bank, Esquivel, suggested that there may be scope for two more rate cuts this year at the end of last week. Most other emerging market central banks are thought to be on hold this year, though a few, including Brazil, are likely to hike.

Rising commodities and equities help underpin the Canadian dollar. The greenback is hovering around last week's low (~CAD1.2660). There is little support ahead of the low set last month, near CAD1.2600, the lowest level for the US dollar since April 2018. A break would target CAD1.2500. The CAD1.2680 area provides the nearby cap.

The US dollar has slipped to new three-week lows against the Mexican peso below MXN19.90. There is little momentum of which to speak. Immediate resistance is seen in the MXN19.95-MXN20.00 band, while the next target is near MXN19.80.

Reuters: "Oil prices soared on Monday to their highest in about 13 months as fears of heightened tensions in the Middle East prompted fresh buying."

I have NEVER seen the variance to the 5-year average this large.

As of 1:00 PM ET on February 15, the population-weighted nationwide temperature is 34.7°F which is 0.2°F colder than yesterday and 12.4°F colder than the historical average. Accumulated Natural Gas-Weighted Degree Days (GWDDs) through 1:00 PM EDT tally 19.7 GWDDs which is 0.4 GWDDs greater than yesterday through the same time and 6.4 GWDDs greater than average. This suggests an above-average contribution of temperature to natural gas demand.

I now think we will see more than a 300 Bcf draw from natural gas storage for the week ending Feb. 19.

We definitely have enough gas in storage to make it through this winter, but (assuming a near normal March & April) the storage level will be more than 200 Bcf below the 5 year average at the end of April. Keep in mind that thousands of well are now offline due to well freeze offs, so supply is also down.

The NYMEX futures contracts for Jul21 through Mar22 are now all over $3.00/MMBtu. < This will raise the valuations of all six of the "gassers" in our model portfolios (AR, CRK, EQT, RRC, GDP, SBOW)