Energy Prospectus

Opening Prices:
> WTI is up 41c to $69.00/Bbl, and Brent is up 46c to $72.05/Bbl.
> Natural gas is down 1.9c to $4.596/MMBtu.

Trading Economics: "US natural gas futures continued to march higher in September, trading above $4.6 per million British thermal units for the first time since December 2018 buoyed by hurricane Ida threat and stronger demand. Natural gas explorers in the US Gulf of Mexico refineries remained offline while energy firms evaluated the aftermath of Hurricane Ida. The demand is likely to remain strong as hot weather is expected to stay until early September. Meanwhile, natural gas prices in Europe surged to above $15 per mmBtu as Europe is facing a shortage. Russia, Europe’s biggest gas supplier, has declined to book big additional flows through pipelines in Ukraine ahead of the completion of the controversial Nord Stream 2 pipeline to Germany."

AEGIS Notes
Oil

Crude oil prices were little changed after OPEC and its allies stuck with a plan to increase oil production, estimating the market can assimilate the extra supply. The uncommonly short OPEC meeting on Wednesday ratified a 400 MMBbl/d increase scheduled for next month.
U.S. Gulf Coast oil and gas infrastructure continues to assess the impact of Hurricane Ida.

It could be some time before the full extent of the damage to the Gulf Coast is known (Bloomberg)
> Access to many facilities along the Louisiana coast is still severely limited
> Electricity was restored to parts in and around New Orleans, Louisiana, last night, but petrochemical assets and refiners may still be weeks away from returning to full strength (Argus)
> Local utility Entergy said its online map of power outages in Louisiana was showing fewer than 800k people without power on Wednesday

U.S. oil stocks fell by 7.2 MMBbl last week, the fourth straight week to the lowest since September 2019 (EIA)
Gasoline stocks rose during the week ended August 27 by 1.3 MMBbl to 227.2 MMBbl
Traders took the overall inventory report in stride with little price change in the overall net-bullish report from the EIA
Expect a more volatile statistic report from the government next Wednesday as the time frame will capture the effects of Hurricane Ida

EIA's Monthly 941 Report shows that US oil production declined from 11,312,000 BOPD in May to 11,307,000 BOPD in June. So...US oil production has flatlined despite a steady increase in the number of active drilling rigs. As mentioned in my weekly podcast, the number of rigs drilling for oil has doubled year-over-year.

Natural Gas

Natural gas prices are down by 1.9c at $4.596 this morning as GoM supply slowly climbs
> About 83% of offshore gas production is still shut, according to the Bureau of Safety and Environmental Enforcement, an improvement from 93.7 on Wednesday
> The EIA is expected to report a 20-Bcf injection for the week ending August 27, which would be less than the 36-Bcf build in the corresponding week of last year
> Analysts estimates ranged from a build of 13 Bcf to 28 Bcf, which compares to the 5-year average build of 54 Bcf
> A build within this range would bring total stocks near 2.871 Tcf, and the deficit to the five-year average would expand to 222 Bcf
> The current end-of-season storage number settled at 3.505 Tcf on ICE

Canadian operators seek to grow natural gas production over the next year (Platts)
> Canadian producers are poised to capitalize on high gas prices as they have less debt, and healthier balance sheets compared to their U.S. counterparts
> Ample takeaway capacity also provides potential to grow beyond current guidance
> Canadian gas production is expected to grow 800 Mcf/d winter-over-winter

BofA Equity Research: WTI likely to flop around in the $65 to $70 range in September

Ida, OPEC… and tight stocks in the US and Europe
In our view, the next few months will probably be amongst the hardest to navigate for
investors since oil collapsed last year. Demand is recovering, but it’s on an uncertain
trajectory punctuated by the COVID Delta variant; but even without a full recovery, US
demand this week stands at the highest level in 10 years, encouraging for what regular
demand looks like in a return to normal. Then there is OPEC+ which, following a short
meeting, reaffirmed that the 400,000 bpd monthly addition in October will go ahead.
The issue is what happens after that and how storm disruptions and other unexpected
events combine to disrupt the global supply/demand balance, but with the most tangible
impacts in the US transitory albeit likely to disrupt production and refinery operations
for several weeks. In our view, all of the above leaves oil market balances largely in the
hands of OPEC+ policy and continued intervention that we believe has been enabled in
part by US E&P capital discipline; as OPEC+ support for oil prices no longer comes at
the cost of market share, we continue to view this as a new normal. With that said, in
every instance where this has happened in the past, it also leaves near term price
volatility firmly in the hands of paper market traders – and with it, keeps technical
signals in place as a notable lead indicator of near term price volatility, as technical
investors follow technical signals.

Paper markets in control: but technical bias more balanced
In this respect, we strongly encourage readers to read our Technical team’s recent report
(Commodities Technical Advantage: What oil’s bullish reversal week means, 29 August
2021) that puts significant resistance for WTI at $70-71with potential for ‘dip buying’
from paper markets around $65. But only if prices trade back down to that level. WTI
managed money net positions stand below the 5 year average for the first time this year
– perhaps signaling some dry powder remains in place. However, one additional
complication is in play that we believe will also be eyed by paper markets: oil stocks in
the Atlantic basin are tight. Up until Hurricane Ida, the ‘negative’ headwind for oil was
expected to be the Fall maintenance season; but with the extent of disruptions to GoM
production – 80% offline or 1.45mm bpd – we suggest the short term outlook has
tightened considerably: crude stocks in both the US and Europe ARA hub stand just 5%
above the lowest levels of the last five years. The only outcome we can predict with
certainty is that with all of these moving parts, oil prices at the front of the curve will
remain volatile. However, we continue to highlight that the long term strip remains
deeply backwardated amidst an obvious supply / demand imbalance given the extent of
supply being held off the market. But as long as OPEC+ policy is to deliberately hold
markets tight, we see an unfavorable balance of risk for paper market bets against spot
prices rolling higher on expiry – keeping the gap between real cashflow and what’s
discounted in the US oils with only one conclusion: valuations for US E&Ps remain
significantly below what is implied by current cashflow, discounted with average oil
prices below $50 WTI. < MY TAKE: I agree that the current share prices for the companies in our Sweet 16 and Small-Cap Growth Portfolio can only be justified if you assume that WTI is going to average $50/bbl and HH gas is going to average $2.75/MMBtu going forward. Based on August 27th closing prices the Sweet 16 was trading at just 3.2 X my operating cash flow per share forecast for 2021. Upstream companies of the quality of our Sweet 16, which are now all generating lots of free cash flow, should be trading for AT LEAST 6X operating CFPS. The only one trading over 5X CFPS is PXD.

NEW YORK (Reuters) -Oil prices rose more than $1 a barrel on Thursday, rebounding on optimism about the pace of global economic growth despite the coronavirus pandemic, as well as on a sharp decline in U.S. crude inventories.

At the time of this post WTI is up $1.63 to $70.22/bbl.

The number of Americans filing new claims for jobless benefits fell last week, while layoffs in August dropped to their lowest level in more than 24 years, suggesting the labor market was charging ahead despite new COVID-19 infections.

"Although oil is lagging equities, its downside is clearly limited by the general confidence surrounding the global economy despite consistent fears of the prolonged spread of the coronavirus," said Tamas Varga, oil analyst at London brokerage PVM Oil Associates.

Optimistic about the global economic recovery, the Organization of the Petroleum Exporting Countries and allied producers including Russia, together known as OPEC+, raised its demand forecast for 2022.

On Wednesday, the group agreed to continue a policy of phasing out record production reductions by adding 400,000 barrels per day (bpd). It did not take up entreaties from the United States to accelerate removal of those supply curbs.

India's gasoline demand is set to hit a record this fiscal year as more people hit the road after easing of COVID-19 curbs.

In the United States, crude inventories dropped by 7.2 million barrels last week, the Energy Information Administration said on Wednesday. [EIA/S]

Hurricane Ida, meanwhile, has affected about 80% of the Gulf of Mexico's oil and gas output. Oil refineries in Louisiana could take weeks to restart, which will sap crude demand, but that could be offset by slow ramp-up of production offshore due to damage to key support facilities. < Refined product inventories that are already below normal will continue to fall in September with so much refining capacity offline.

"Crude oil processing will probably take considerably longer to recover from the outages than crude oil production, which suggests that crude oil stocks will increase in the coming weeks," said Commerzbank (DE:CBKG) analyst Carsten Fritsch.

Closing Prices:
> WTI prompt month (OCT 21) was up $1.40 on the day, to settle at $69.99/Bbl.
> NG prompt month (OCT 21) was up $0.026 on the day, to settle at $4.641/MMBtu.