Energy Prospectus

I am reporting ftom Dallas today

Opening Prices:'
> WTI is down $1.33 to $62.36/Bbl, and Brent is down $1.21 to $65.24/Bbl. < To justify the current Sweet 16 share prices I have to assume $50 or less wti for all future period ...
> Natural gas is up 8.3c to $3.913/MMBtu. < and HH gas price of $2.50 for all future periods.

AEGIS Notes
Oil

Oil on track to end the week 7% lower, down for a seventh straight session and near multi-month lows
Surging COVID-19 cases and ensuing lockdowns are to blame for dampening the outlook for oil product demand
Commodities, in general, were also feeling downward pressure this week after the Fed said its considering reducing monthly stimulus that has caused the dollar to rally

China has imposed new restrictions with its “zero tolerance” coronavirus policy (Bloomberg)
New Zealand and Australia have also instituted new strict lockdown measures amid the rise in cases

Oil time-spreads have continued to weaken as prices have relaxed
Brent’s 12-month backwardation has fallen to -26c/Bbl to +$3.34/Bbl; the weakest since May 21
Bank of America analysts said in an Aug. 19 report that the Brent curve is set to flatten
“We are still set for a period of range-bound oil prices for the next six months, but we now see a flatter Brent crude oil term structure in into the winter, dragged down by distillates.”

Natural Gas

Natural gas futures are up 9.1c this morning at $3.91 after falling 2.2c yesterday
The prompt-month contract reached its lowest point of the week at $3.73 after yesterdays storage report but rallied into the settle to limit losses

Hurricane Grace is taking aim for Central Mexico and will make its second landfall today. If power infrastructure is damaged, it could dampen South Texas prices as outages could reduce the country’s need for Texas gas

The EIA reported a storage build of 46 Bcf for the week ending August 13
Total stocks are now at 2,822 Bcf, with the end-of-season storage number being offered at 3,510 Bcf on ICE
The build was larger than both last year’s 45-Bcf injection during the corresponding week and the five-year average of 42-Bcf
The supply/demand backdrop has remained quite bullish, despite the EIA’s inventory report of 46-Bcf
The inventory number included a 4-Bcf reclassification from base gas to working gas, which puts the implied flow at 42 Bcf

Reuters . U.S. crude oil stockpiles dropped last week to their lowest levels since January 2020, the Energy Information Administration said on Wednesday. Inventories have been declining for several months as U.S. fuel demand has rebounded with Americans getting vaccinated against coronavirus. Infections, however, are surging again and analysts are watching to see if fuel demand slackens, particularly across southern states where the number of people infected has surged.

I drove from Houston to Dallas yesterday and my observation is the transportation fuel demand in Texas is still very high. Heavy traffic with lots of trucks during the entire drive.

Closing Prices:
> WTI prompt month (SEP 21) was down $1.37 on the day, to settle at $62.32/Bbl. WTI loses $6.12 on the week. < FEAR of the Covid Delta Variant is the primary driver of oil prices. Global inventories do keep falling but fear of less demand is frightening the longs.
> In contrast, NG prompt month (SEP 21) was up $0.021 on the day, to settle at $3.851/MMBtu. < I now expect HH gas to average more than $4.00 in Q4.

Dan, will this 20% drop affect frac spreads, rig count and psychology in November?

It's dropped psychology in August.

I see Opec delaying production increases and Oil bouncing back. No one is going to support a total shutdown. I think this year production is locked in. The E&P firms have been holding the line in expanding CAPX budgets. I see this drop in crude maintaining current levels of production

Thanks for color. As good as E&P performance was in Q1 and Q2 the physical products have been the superior trade

For the US public companies capex is locked in for the remainder of 2021. I expect only a minor increase in the active rig count by non-public companies. They will complete a few more wells than they drill through year end to get more good DUCs into their year-end reserve reports.

US oil production will only rise slightly into year-end. Since November, 2020 US oil production has increased ~250,000 bpd to ~11,400,000 bpd. There is NO WAY that US production gets back to 12,860,000 bpd in 2022, which is IEA's forecast.

OPEC+ is watching the global supply/demand balance carefully and they will make adjustments to their plan if necessary. I'm not sure they will need to do anything different for a few months because global demand for oil still exceeds supply. US and OECD oil inventories continue to fall.