Energy Prospectus

Opening Prices:
> WTI is down $4.40 to $73.99/Bbl, and Brent is down $4.35 to $77.87/Bbl.
> Natural gas is up 19.7c to $5.265/MMBtu.

MY TAKE: Oil price moves based on FEAR seldom last. The holiday is also having an impact.

AEGIS Notes
Oil

Oil prices were down nearly $5/Bbl on Friday morning as a new COVID-19 variant rattled traders and investors (Reuters)
> Scientists consider this variant the most significant found to date, sparking fears of renewed travel restrictions and pressured economic growth
> The plunge lower came with a broad sell-off in the equity markets, with the Dow Jones dropping more than 800 points (CNBC)

Global oil prices were already under pressure after the Biden Administration announced plans to release 50 MMBbl from the SPR
> Analysts were already forecasting oversupply in 2022, and with coordinated global reserve releases, plus a new, possibly more dangerous variant, traders are removing risk
> OPEC and its allies are set to meet on December 2 to discuss their production policy

Natural Gas

The December ’21 gas contract is up by 19.7c this morning at $5.265 as it heads into expiry
> LNG feedgas demand is at a new record of 12.34 Bcf/d this morning
> Cheniere’s Sabine Pass Train 6 makes its first LNG, flows at the site increased to a record of 4.6 Bcf/d

The EIA reported a 21-Bcf draw for the week ending November 19
> The draw was within expectations and narrowed the deficit to the five-year average to 58 Bcf from 81 Bcf
> AEGIS notes that when adjusting the stat for weather, it was notably tighter and is consistent with the trend observed over the last several weeks

U.S. natural gas production nears pre-pandemic highs (Platts)
> According to Platts, U.S. dry gas production topped 95 Bcf/d on November 24, hitting a nearly two-year high
> The mark comes after an almost eight-week drive where producers lifted output from depressed levels of 90.1 Bcf/d after Hurricane Ida caused extensive damage
> Production in the Appalachian region jumped to a record-high earlier this month as Transco’s Leidy South Expansion project came online, bringing 580 MMcf/d of additional capacity
> Haynesville output has also set multiple successive record-highs at more than 14.1 Bcf/d, with Platts chalking the gains up to record LNG demand
> The recent production gains have come amid relatively little change in the Baker Hughes gas-directed drilling rig total < Upstream companies are "opening the values to harvest high gas and NGL prices".

NG closed up 32.5 cents up 6.3%.

Makes no sense that any NG would go down today

Dan I put your quote below on a post-it note in my office. Great advice!

"Here is a hard and fast rule: Whenever the price of a commodity pulls back because of FEAR, it only takes less FEAR for the price to rebound."

Energy Report: COVID And Turkey
By Phil Flynn Nov 26, 2021 08:24AM ET

Once again Thanksgiving oil markets lived up to their notorious holiday reputation plunging on light holiday volume in response to reports of a new Covid Variant found in South Africa. Oh, sure the reports of this strain are concerning but a 6.5% one-day drop?

Fox News reported that The World Health Organization is holding a meeting Friday to discuss the dramatic rise in COVID-19 cases in South Africa that has been blamed on a new variant of the virus. Joe Phaahla, South Africa’s minister of health, identified the new variant as B.1.1.529 and said it seems highly contagious among young people.

The BBC reported that the new variant seems to be the most heavily mutated so far in the outbreak. James Gallagher, the health correspondent, wrote that one scientist described the variant as “horrific.” He said the meeting of the WHO will likely result in the variant receiving a Greek code-name, like the Delta variant.

The Wall Street Journal reported that dozens of countries restricted travel to and from South Africa and neighboring nations Friday, hoping to contain a fast-spreading new variant of the coronavirus that scientists say may be more contagious and could render the current crop of Covid-19 vaccines less effective.

While scientists say they are still figuring out the exact effects of the more than 50 mutations they have identified in the new variant, it has been driving a sharp rise in infections in South Africa over the past two weeks, albeit from very low levels. It has also been detected in Botswana and two travelers in Hong Kong. Israel, one of the countries that restricted travel from southern Africa, said Friday it had identified the B.1.1.529 variant in a traveler from Malawi and was investigating whether it had also infected two others.

For oil, traders are putting the fear of this new strain ahead of the reality. While we have to take it seriously more than like oil should find a floor in the $72 area. Like I have warned that light volume on Thanksgiving historically distorts and overdoes these moves. The worries are still that US volume today will be light but the markets look to be ahead of the risk even though we are not even close to understanding how bad this new variant might be.

Yet the move will give pause to OPEC plus whose meets next week. Now with this Covid fear price drop along with concerns of a supply surplus next quarter will give them enough political cover to pause the oil production increase in a way that won’t so much now look like a retaliatory move against the Biden Administration. As far as the prices drop goes, I am sure the Biden Administration will take a victory lap and we should let them because let us face it, they have had so few.

Price-wise for oil this should be like a Black Friday Discount sale. Fundamentally oil looks cheap near $72. While I can not tell how bad this variant might be and whether it will lead to massive lockdown but if it does not then we are probably going to set the year low price today. Of course, if this variant does turn out to be a lot worse than the Delta variant then all bets are off. Still, if I had an upside price risk I would use this break as a hedging opportunity.

Natural Gas on the other hand is looking quite bullish. Lockdown fears could hurt demand but not as bad as oil. The weather looks like the cold will set in and we may see nat gas make a nice run.
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MY TAKE: Unless this new variant turns out to be the Angel of Death, WTI will be back over $70/bbl on Monday and OPEC+ will announce a pause in their production increases that will push WTI over $75/bbl by next Friday.

Thanks for the color Dan you've navigated these markets very well. The spike in OVX well above August levels surprised me

>I am sure the Biden Administration will take a victory lap and we should let them because let us face it, they have had so few.

LOLOL

He wrote this when oil was down 6 % it closed down twice that.

It’s the perfect excuse for OPEC to pause production increases for a month or two.

Though looking at the March and July pullbacks, Fear always seems to go too far.
As far as I’m concerned, when the fear bottom is in, time to rebalance into the higher beta Sweet 16 stocks.
Then rebalance again on the other side of the fear.

Kevin