Energy Prospectus

Opening Prices:
> WTI is up 71c to $75.87/Bbl, and Brent is down 19c to $76.97/Bbl.
AEGIS Note: The Trend remains UP and Buyers are in Control above $74.00. Only a weekly close below $71.00 would change the Trend to DOWN, implying a significant disappointment from OPEC.

> Natural gas is up 3.7c to $3.737/MMBtu.
AEGIS Note: The Trend is UP. Buyers are in Control above $3.65. A change in Trend requires a Friday close below $3.13.

AEGIS Notes
Crude Oil

West Texas Intermediate traded at a six-year high Tuesday morning of $76.97/Bbl following OPEC member disagreements
Saudi Arabia and the UAE tussle is blocking a supply increase
The oil markets were counting on a 400 MBbl/d increase in supply for August
OPEC+ canceled its meeting to discuss a rise in output after multiple days of debate

Timespreads for Brent soared amid OPEC+’s failure to agree on production increases (Bloomberg)
Brent’s prompt spread topped $1/Bbl on Tuesday, with medium- and long-term spreads also rising
The September-October spread rose 12c to 99c/Bbl backwardation on Monday
Brent crude’s twelve-month timespread is currently at -$6.55/Bbl – a severe amount of backwardation, driven by near-term contract strength

Natural Gas

The prompt-month Henry Hub contract is on its longest win streak since May 2000
The prompt contract has posted ten consecutive daily gains and is up 45c during that period
The August ’21 contract is trading near $3.71/MMBtu

IEA forecast 2021 gas demand will top pre-COVID levels
Worldwide consumption is set to increase by 3.9% in 2021, after falling by 1.9% in 2020 < On a percentage bases, global demand for natural gas has been growing at more than double the rate of demand for oil. It has been going on for several years.
Industrial consumption of natural gas will see the largest growth, while additional consumption gains will come from countries trying to shift to less emissions-intensive fuels

Northeast supply increased by nearly 2 Bcf/d over the holiday weekend as outages at two Appalachian processing plants were resolved
Flows recorded to the Sherwood and Mobley processing plants were up by nearly 3 Bcf/, from 350 MMcf/d on July 2
The prompt-month Dom South contract rallied by 15 following the outage, but now that flows have returned, we could see downside pressure to local prices. Also, the increase supply will likely pressure prices at Henry Hub

Note from Piper Sandler dated 7-5-2021

Oil prices are up ~50-60% YTD, to levels far beyond consensus expectations coming
into this year, due to the convergence of pent-up-demand recovery, non-OPEC
redefined capital allocation, and the OPEC+ policy of production restraint.
Above ground inventories have drawn prodigiously since peaking last July, although this has
come about, in part, by retaining ample sub-surface inventory in the form of spare
production capacity. OECD inventories peaked last July at ~3.2 billion barrels and have
subsequently contracted by close to 300 mb or an average of 1.1 MBD through April.
While April inventories were flat m/m, it was the first month in more than a year that stocks
fell below the pre-pandemic 5-yr (2015-2019) average. Accordingly, in the event OPEC
+ continues to debate, dither and delay with respect to increasing production quotas and
targets, the potential inventory contraction from a leaned-out baseline could be cathartic.
To date the pricing transmission mechanism for oil has been over-indexed to above
ground vs. sub-surface inventory.

Accordingly, we have been of the view, as has the IEA, that an acceleration and augmentation
of spare capacity normalization is needed in order to avoid a price spike. Brent/WTI are
hovering at ~$76-77/bbl, and average domestic gasoline prices have climbed to $3.13/gal vs
a beginning-of-year print of $2.25/gal, and summer driving season is ripping.

• To date, the OPEC+ consortium, per its April declaration, has persisted in targeting spare
capacity normalization or an aggregate production increase of ~2.1 MBD over the May-July
period, with Saudi accounting for ~2/3 of the surge. Global oil production is expected to revive
by ~3.8 MBD over the April-Dec time frame. In the recently published OPEC MOMR, projected
global demand is expected to sequentially increase by 6.9 MBD over Q1-Q4, culminating in
99.74 MBD in Q4. This essentially mirrors the IEA’s expected demand trajectory and outcome
over the Q1-Q4 time frame (+6 MBD). Thus, more oil is needed in order to avoid a meaningful
contraction in global inventories.

• Admittedly, Iran remains a complicating factor, with an estimated 1.5 MBD of shut-in production
due to sanctions, although the prospect of a break-through in the US-Iranian deliberations
has diminished due to the election of conservative and hardline cleric, Ebrahim Raisi.
Notwithstanding, UN Secretary General Antonio Guterres, in a recent semi-annual report to
the UN Security Council, has appealed to the Biden Administration to lift or waive all sanctions
on Iran per the 2015 concord (between Iran and the US, Britain, France Germany, China and
Russia) originally aimed at deterring Iran from developing a nuclear weapon.

• Moreover, Covid remains an unpredictable menace given continued vaccine inequity and the
race between Covid-variants and vaccination campaigns.

• Where do we go from here?
The consensus expectation is that absent a well-defined signal
to increase production, oil prices will continue to march higher and perhaps sharply higher.
Alternatively, an OPEC market share war can’t be ruled-out should the current impasse persist. The
range of outcomes, as a result of the breakdown in consortium solidarity, has widened. Can
OPEC+ deliberations and discussions be revived? Yes, and in the opinion of this analyst, they
likely will be. Will Saudi and Russia shed crocodile tears over a likely increase in oil and refined
product pricing, with likely negative implications for the Biden Administration and Democratic
incumbents in red/purple states? Perhaps, but if they’re thinking strategically, Petro-states will
be better served by achieving a benign glide-path for oil demand rather than a premature
truncation due to a price spike.

Closing Prices:
> WTI prompt month (AUG 21) was down $1.79 on the day, to settle at $73.37/Bbl.
> NG prompt month (AUG 21) was down $0.063 on the day, to settle at $3.637/MMBtu.

MY TAKE: This noise surrounding the disagreement between UAE and Saudi Arabia is meaningless. Six months from now we will need every drop of OPEC+ spare capacity to get back online. SA should just raise the UAE quota and move on.

The Energy Report: Now They Want More Oil
By Phil Flynn (Jul 06, 2021 12:04PM ET)

The Biden administration is probably having second thoughts about its energy policy as it becomes clear that a breakdown in talks between Saudi Arabia and the UAE over a production increase could leave the oil market under supplied and the U.S. economy at risk. The Biden administration is calling for OPEC to raise production after the UAE and Saudi Arabia failed to settle their differences about the baseline for a production increase, driving oil to an eight-year high.

That might seem a bit hypocritical because the Biden administration put drilling moratoriums on federal land and more restrictions on U.S. drilling, allowing OPEC+ to have more sway over global oil prices. Calling for more oil production seems to be at odds with the administration’s war against climate change. The Biden administration’s energy policy has many companies looking to become more carbon-neutral, leading to under-investment in U.S. oil and gas, thereby seceding our energy independence to OPEC+. Instead of setting the global energy agenda, we’re now back to begging OPEC+ to raise production. The bending of OPEC for more oil goes back to the days before the U.S. shale revolution, when U.S. shale producers kept global oil prices in check. Now that the Biden administration has restrained shale producers, we’re seeing the impact it’s going to have on oil prices and the economy.

This looming oil crisis is not a surprise to readers of The Energy Report because we predicted that this would happen if Biden was elected president. While there are other reasons for oil prices going up, like the global economic reopening, lack of investment in the oil sector that has been going on, we made it quite clear that the policies that Biden was going to put in place would only exasperate the situation. And that is exactly what happened.

The Wall Street Journal says that early last year, the Saudi-Russia group agreed to cut its collective output by some 9.7 million barrels a day, taking out the equivalent of about 10% of 2019 global demand when economies were shutting down. The move supported prices. As economies went back up, the group has restored a big chunk of that. On Friday, most delegates agreed to a deal to gradually undo the remaining cuts, some 5.8 million barrels a day, by increasing production by 400,000 barrels a day each month through late 2022. Reuters reported that, “OPEC+ ministers called off oil output talks on Monday after clashing last week when the United Arab Emirates rejected a proposed eight-month extension to output curbs, meaning no deal to boost production has been agreed. Saudi energy minister Prince Abdulaziz bin Salman had called for “compromise and rationality” to secure a deal after two days of failed discussions last week. But four OPEC+ sources said there had been no progress. OPEC’s Secretary-General Mohammad Barkindo said in a statement on Monday the meeting had been cancelled without a date for the next one being agreed. Even with the production increase that they were going to do it was the bare minimum that the market needs. Some suspect that may be part of this drama between Saudi Arabia and the UAE, because let’s face it, it only putting more money in their pockets.

Sadly, we are not seeing the U.S. oil and gas producer take advantage of this situation. Most people agree that we need to reduce our use of fossil fuels, yet I think you have to have a better plan than the all-or-nothing approach by the Biden administration to reduce fossil fuel usage. They have these unrealistic goals of trying to go carbon neutral with technologies that don’t exist, but do not taken into account the real impact these higher energy prices will have on the economy and the lives of the average everyday American.

Obviously, for oil and products and even natural gas, we seem to be in a by-the-break mode. We’ve been warning about this supply squeeze for over a year and now everybody is on board as the reality of the situation has become clear. Wow! A surprise agreement between Saudi Arabia and the UAE may settle things down. If we don’t get an agreement, then prices are probably going to head up to the mid-80s. The Saudis are so convinced that this is going to last that they’ve already raised the selling price for crude oil to Asia.

Natural gas markets are getting a boost because of the hot temperatures that we saw in the Midwest. Andrew Weisman of EBWanalytics says signals for natural gas are mixed. On the bearish side, the outage at Mark west’s gas processing plants in West Virginia has ended, allowing production in the Northeast to rebound. This recovery has been offset though by: (i) a significant gain in CDDs over the weekend; (ii) the likelihood that EIA will report an extremely small injection Thursday; and (ii) a continued surge in European gas prices. So far, in electronic trading, bullish changes have prevailed. Model runs tonight will determine whether these gains are retained.