Energy Prospectus

After the market's closed yesterday:
"After declining earlier in the session, oil prices rose 1% supported by the expected slow return of US crude output following a violent winter blast in Texas and Plains states that forced the shutdown of wells and processing plants. Meantime, stockpiles at a key European storage hub are at their lowest level since September according to Genscape while latest API data showed US crude inventories rose for the first time in five weeks. Traders now await official oil inventory data from the US EIA later in the day. A bullish view dominates sentiment after oil prices recovered to pre-pandemic levels earlier this month as investors expect further market tightening and a global economic recovery supported by a COVID-19 vaccination campaign globally. In the morning trading in New York, WTI was trading around $62.3 a barrel and Brent about $66.2 a barrel." - Trading Economics < U.S. crude oil inventories will probably move higher for the week ending Feb 19 because a lot of Gulf Coast refining capacity was offline because of power outages and freezing temperatures.

Opening Prices:
> WTI is up 32c to $61.99/Bbl, and Brent is up 49c to $65.86/Bbl.
> Natural gas is down 2.8c to $2.851/MMBtu.

AEGIS Morning Notes
Crude Oil

Texas driller restore 80% of crude output following last week’s freeze
Production in the Permian Basin in Texas is at about 2.9 MMBbl/d, up from 600 MBbl/d during the height of the storm, according to OilX. The region typically produces around 3.5 MMBbl/d
The recovery comes after grid operators restored power across much of the state. Occidental petroleum, the Permian’s second-largest producer, said that 90% of its output is back online on Tuesday

Keystone XL pipeline cancellation prompts interest in crude-by-rail < Biden's gift to Warren Buffet.
Oil export by rail has tripled since July, and the trend is expected to continue after the Biden Administration killed the pipeline

Gibson Energy Inc, an oil transportation company, signed a 10-year contract with ConnocPhillips to process oil-sands crude before loading it on crude train terminals
With the Keystone Pipeline canceled, Western Canadian crude will likely have to be discounted even more to account for the increased transportation cost

EIA weekly data is due at 9:30 am CST
U.S. Crude Inventories: – 6,742 MBbls (Avg. Bloomberg surveys) < I doubt to see a draw since a lot of refineries went offline last week.
U.S. Gasoline Inventories: – 3,515 MBbls
U.S. Distillate Inventories: – 4,718 MBbls
U.S. Refinery Utilization: – 6.99% change

Natural Gas

Natural gas in storage is expected to show a 333 Bcf drop when the EIA reports data on Thursday for the week ended February 19, according to Platts estimates
If accurate, it would be the second-largest draw on record, and only the second weekly draw to register over 300 Bcf
A polar vortex dipped down deep into the southern U.S. and Texas last week, causing large swings in demand and resulted in production outages
The large swings added to the difficulty of predicting last week’s gas withdrawal as economist estimates range from a low of -301 Bcf to a high of -347, according to Bloomberg data

The Mountain Valley Pipeline (MVP) is looking at amending its current FERC application and says it remains on schedule for completion by the end of 2021 (Equitrans)
Following through on a promise to revamp its permitting process in late January, MVP filed an abbreviated application at FERC to use trenchless water crossings methods at 120 locations to cross 181 water bodies and wetlands (Roanoke Times)
The new individual and more complicated permit process is expected to push completion of the pipeline well into next year according to Height Capital Markets, an IB firm that is closely following the project
MVP will be a 303-mile, 2 Bcf/d natural gas project, connecting Appalachia to Mid-Atlantic markets

Dry gas production in the Lower 48 has nearly fully recovered to pre-freeze off levels of early February (PointLogic)
NG production stands at 89.3 Bcf/d as of February 24, compared to 90.6 Bcf/d on February 8
Texas is still being modeled as producing at a lower level of 20.8 Bcf/d versus February 8 volumes of 22.1 Bcf/d, according to PointLogic data
AEGIS notes that Texas production can be difficult to calculate in real-time due to the low sample size and abundance of intrastate pipelines that do not have to report nominations

AEGIS Notes: "AEGIS Alerts - Oil demand disruptions overwhelmed supply losses last week, per EIA. Inventories for the US are now at a surplus of 20.159 MBbls to last year and a surplus of 0.47 MBbls to the five-year average." < MY TAKE: By the end of Q1, U.S. oil and total petroleum inventories will go below the 5-year average and we use a lot more oil based products than we did 5 years ago. OECD inventories are falling like a rock, just as I have been telling you week-after-week in my podcast that they would. When OECD inventories go below 30 days of supply (probably in Q2) then oil prices have a shot a triple digits. You should all listen to the interview with Marshall Atkins that I posted here last week.

Closing Prices;
> WTI prompt month (APR 21) was up $1.55 on the day, to settle at $63.22/Bbl.< This compares to what I am using as my Q2 WTI oil price of $55/bbl.
> NG prompt month (MAR 21) was down $0.025 on the day, to settle at $2.854/MMBtu.

Why is oil going up so fast?
This might help you understand why.

Martijn Rats, CFA – Morgan Stanley's top energy sector analyst based in London

We estimate that the oil market has been ~2.8 mb/d undersupplied so far this year. If sustained, 1Q could turn out to be the most undersupplied quarter since at least 2000. With mobility statistics bottoming out and demand set to improve from here, we raise our 3Q Brent forecast to $70/bbl.

Oil market coming into syzygy: The stars have aligned for the oil market even faster than expected.
> Covid-19 cases are falling globally, mobility statistics are bottoming out, non-OECD refineries are running as hard as before coronavirus, inventories are drawing, time spreads are becoming deeply backwardated and physical North Sea diffs have strengthened.
> In response, Dated Brent has rallied ~25% so far this year - the strongest start of any year since the creation of the Dated Brent contract in 1988. This is remarkable as global demand is still running 5-6 mb/d below pre-coronavirus levels.
> Undersupply of ~2.8 mb/d well ahead of key agency forecasts: Aggregating all inventory data that is available globally, we can identify ~102 mln barrels of stocks draws since the start of the year - a draw rate of ~2 mb/d. However, for every 1 barrel of observed inventory change captured by our analysis, IEA data suggests an actual supply/demand imbalance of 1.4 barrels. On that basis, the oil market would be as much as 2.8 mb/d undersupplied so far in 1Q - a post-2000 record.
> Positioning and roll yield arguments stay supportive too: Speculative positioning in Brent and WTI futures is improving but remains light, both by historical standards as well as compared to other commodities. At the same time, all our short-term indicators are still firmly in 'buy' territory. Combined, this suggests a further upward bias to prices.
> That said, some factors are starting to exert some gravitational pull down: 12-month forward WTI is now trading $15-20/bbl above average shale break-evens, close to the highs set in 2011 and 2018. This presents a real test of capital discipline in the US shale sector. On top, the calendar spread between the 1st and 12th month Brent contract is in its 99th percentile, based on data from the last 15 years. As discussed inside, this time spread is justified relative to inventories, but only if one assumes demand will largely normalise. On top, the return of Iranian supply is a risk that hangs over the oil market.

We raise our 2H forecast to $65-70/bbl, with a $70 peak in 3Q: One of the lessons of the oil market over the last decade - and again in 2020 - is that momentum typically carries on for longer than expected. We raise our forecasts for 2H21 when the demand recovery is likely to be in full swing. For 1H22, our new Brent forecast is $60/bbl, up from $55 before.