Energy Prospectus

I will be discussing the oil and gas markets on my webinar this morning at 10AM CT. Register if you wish to attend.

Opening Prices:
> WTI is up 64c to $73.58/Bbl, and Brent is up 49c to $74.61/Bbl.
> Natural gas is up 1.1c to $3.699/MMBtu.
Yesterday's bullish oil, gas inventory reports help both prices start the day in positive territory
AEGIS Notes
Crude Oil

West Texas Intermediate continues to jostle in the low $70’s as oil market participants digest a clash inside OPEC+
To start the week, WTI traded just shy of $77 on concerns that an OPEC+ no-deal would leave oil markets even tighter
Traders turned focus throughout the week to what a Saudi and UAE spat could mean for the OPEC+ alliance, and oil prices fell amid the uncertainty

Gasoline demand was propelled to an all-time weekly record last week, according to the Energy Information Agency
Estimated U.S. demand for gasoline rose to 10 MMBbl/d the week ended July 2, the highest in data going back to 1990
The record came as Americans took to the road for the July 4 holiday
The EIA also reported a seventh consecutive decline in crude oil stocks – further reducing supply in the U.S.

A renewed nuclear deal between the U.S. and Iran may be slipping away as talks drag on (Bloomberg)
Biden’s team is beginning to consider the possibility that it may soon be too late to salvage the 2015 nuclear accord with Iran, according to Bloomberg
After six rounds of negotiations, there is little sign of when a seventh might start
Further, negotiations are complicated by Iran’s election of a new hard-liner president
AEGIS notes that Iran has the capability to export between 1.5-2 MMBbl/d of oil if sanctions were lifted

Natural Gas

California prepares for hot summer with gas balancing as hydro generation continues to underperform
Power outages in California were compounded by a drought that had cut hydropower by about 1,000 MW from expected levels and some unplanned gas power plant outages during the heat event from June 15 – June 22
The states energy regulators also expect to be able to import power from other states once the heatwave has subsided

The EIA reported a 16-Bcf build for the week ending July 2; the build was much smaller than the 33-Bcf build analysts expected
Total stocks now stand at 2.574 Tcf, which is 190 Bcf below the five-year average, and 551 Bcf less than a year ago
The end-of-season storage EIA inventory estimate on ICE was at 3.66 Tcf following the latest injection report
Yesterday’s stat was the lowest mark during the corresponding week on record, according to the EIA.
The number also implied the tightest S&D balance since February

The Energy Report: Toppy And Floppy
By Phil Flynn Jul 08, 2021 09:02AM ET

Oil traders are forgetting the bullish underlying fundamentals for oil and instead focusing on the drama between the UAE and Saudi Arabia.

Their decision to raise production and the UAE’s desire to increase its own production, could lead to a breakdown of the OPEC plus alliance.

From a technical standpoint, the market does look a little toppy. The combination of the 4th of July holiday peak, as well as the OPEC drama, seems to be overshadowing the fact that oil supplies are still very tight.

The crude oil market sold off a bit overnight as reports came out that OPEC plus did increase their oil production last month by 540,000 barrels due to strong demand for crude. At the same time their compliance rate runs at 110%.

There’s growing pressure on the OPEC plus cartel to provide more oil and with the UAE getting ready to go it alone, the markets may anticipate more oil.

Putting the drama aside and looking at the oil inventory numbers, there is no doubt that we need more oil. The American Petroleum Institute suggested that the record-breaking drop in US crude supplies continues.

In their weekly report, the API reported that crude oil inventories fell 7.983 million barrels. Surprisingly though, supplies in Cushing, OK rose by 152 thousand barrels. Most people expected those supplies to fall.

The API reported a big drop in gasoline supplies to the tune of 2.736 million barrels that was reflective of gasoline going up to meet the surge and demand for the 4th of July holiday. The API reported that distilling inventories rose by 1.086 million barrels.

Now the question is will any of this matter. A lot of traders are still focused on the OPEC spat. Oil prices got hit hard with the report that the UAE wants to raise oil production.

The Wall Street Journal reported that,

“Behind the standoff inside OPEC over whether to boost oil production is a key cartel member with a new strategy: sell as much crude as possible before demand dries up. The United Arab Emirates’s strategy, as described by officials familiar with the matter, represents one of the most significant shifts in oil policy by a major Mideast petrostate.

"For years, the region’s oil-producing governments have said they aren’t worried about finding crude buyers far into the future. The U.A.E., which holds some of the world’s largest untapped crude reserves, is breaking from that orthodoxy, according to people familiar with the strategy.

“This is the time to maximize the value of the country’s hydrocarbon resources, while they have value,” said a person briefed on the U.A.E.’s strategy. “The investment aims to generate revenue for the diversification of the economy, both for investment in new energy and, as importantly, in new revenue streams.”

The UAE isn’t worried about a sudden drop in demand and expects to have buyers for its crude for decades. However, people familiar with the new tactic say the country wants to pump and sell as much as it can now when demand and prices are strong. Proceeds will help it wean its economy off oil.

“Market share is a key factor here,” said a senior U.A.E. oil executive. “We want a bigger market share, to monetize as much as we can from our reserves, especially when we have spent billions developing them. Spokespersons for the U.A.E.’s energy ministry and the Abu Dhabi government didn’t reply to requests for comment according to the Wall Street Journal."

So my take is that now some of the biggest oil producing countries are buying into the peak demand theory even though I think that the so-called peak demand theory, where alternatives are going to significantly reduce the demand for crude, is quite overblown.

We all remember the theory of peak oil where the world was going to run out of oil. Now we’re on the other end of the argument where we’re concerned about peak demand.

Our take is that we’re still going to see a significant increase in the use of fossil fuels for many years to come. I believe that the transition to green energy such as solar, wind and electric cars have a lot more challenges than the environmentalists believe.

We don’t believe that we’re going to see peak demand anytime soon and probably not within the next 30 years. If that’s the case, then the UAE should not be too worried about making more and more money before demand falls off.

Demand growth may be smaller than it would have been, but make no mistake about it, the world is going to need fossil fuels for the foreseeable future and beyond.

The Biden administration is getting more and more concerned about the rising gasoline prices. They’re starting to read the polls that increasingly are showing that consumers are putting blame on the Biden administration for the price increases and well they should be.

The Biden administration is going to try to argue that they are virtuous when it comes to low gasoline prices but their policies suggest the opposite.

This is evidenced by the drilling moratorium, canceling the Keystone Pipeline, putting more restrictions on drilling, more restrictions on pipeline operators, frightening investors away from fossil fuel investment. These are all contributors in this meteoric rise in gasoline prices.

While the Biden administration can argue other factors driving gasoline prices, at the end of the day, they own these prices. They’re the ones in charge, they’re the ones that are going to get the blame. Can the Biden administration point out any policy that they have supported or enacted that would reduce gasoline prices? Nope, I don’t think so.

Oh sure, they are against a tax on gasoline to help pay for their infrastructure program, but that is a tax that doesn’t even exist currently. If that’s the crux of their argument, of what they’ve done to lower gasoline prices, then they’re going to get a significant amount of blame from the American public for these prices. Deservedly so.

Make no mistake about it, the market looks technically weak right now. The risk-off mood in the stock market is not helping the situation. Why we have no doubt that the market is still going to go higher over time, in the short term we could foresee a scenario for a further correction.

Most of it is technical and a lot of it is the OPEC plus disagreement. We do expect to see another big draw in inventories in the Energy Information Administration report today and that may give us a little bit of support.

But from a technical viewpoint, it wouldn’t be surprising to see oil prices try to test the lower Bollinger® Band somewhere in the $68.00 a barrel area before building some support for another potential run higher.

The natural gas market has been very solid. It’s pulled back on some cooling temperatures and some thought that demand could ease. The U.S. shale industry continues to consolidate with major mergers and acquisitions announced since the second half of 2020.

Closing Prices:
> WTI prompt month (AUG 21) was up $1.62 on the day, to settle at $74.56/Bbl.
> In contrast, NG prompt month (AUG 21) was down $0.014 on the day, to settle at $3.674/MMBtu.

Quite a Roller Coaster ride for WTI this week.
MT TAKE: If OPEC+ can make a deal with UAE and big draws from U.S. crude oil inventories continue, we should see WTI over $80 in August. We definitely are dealing with an oil price cycle that is going to over-shoot the mark and end up with a global oil shortage by this time next year.