Energy Prospectus

Opening Prices:
> WTI is up $1.17 to $84.99/Bbl, and Brent is up 85c to $87.33/Bbl.
> Natural gas is up 3.2c to $4.294/MMBtu.

AEGIS Notes
Oil

OPEC expects global oil markets to remain well-supported this year by robust demand
> The group has maintained a confident outlook that allows the group to continue to revive production
> Brent, WTI prices climbed to their highest since 2014 as demand has been resilient despite Omicron, and supply disruptions have continued to tighten the supply-demand backdrop
> OPEC+ has continued to underperform versus its quotas, another bullish catalyst affecting oil markets. The group increased output by 166 MBbl/d in December, in contrast with its target of 250 MBbl/d < 14 countries have reached max production capacity that is below their quotas.
> AEGIS notes that OPEC’s inability to meet its quotas has caused many market analysts to question how much spare capacity the group is really holding back

Goldman sees $100/bbl Brent by 3Q2022, $96/bbl average for 2022
> GS says robust fundamentals have helped reverse last year’s selloff.
> Demand has been quite resilient, while supply disruptions have aided the drawdown in global inventories
> By summer, OECD inventories will be at the lowest level since 2000, and OPEC+ spare capacity will be near historically low levels of 1.2 MMBbl/d
MY TAKE: OPEC+ spare capacity is already much lower than what they are telling the market.

Natural Gas

Natural gas is up 3.2c to $4.294/MMBtu this morning as weather models were relatively stable over the long weekend
> U.S. gas production has failed to recover to 2021 year-end levels, as volumes still remain near 92 Bcf/d after freeze-offs
> Gas demand is expected to spike this next week to 132 Bcf/d as the U.S. experiences the coldest week of the season
> The gas-focused rig count rose by 2 rigs for the week ending January 14th, as the total rig count climbed to 109, up 25 from 84 one year ago
> U.S. LNG feedgas nearly touched record levels on Saturday at 13.3 Bcf/d, with Sabine Pass hitting a facility record 5.11 Bcf/d in feedgas, before totals dropped to 12.4 Bcf/d this morning

OPEC and Russia are very close to maximum production already

"OPEC+ remain steadfast in adding 400,000 bpd back to the market each month, but our data suggests that monthly additions tally closer to 250,000 bpd," said RBC Capital Markets commodity strategist Mike Tran in a note, as quoted by Reuters.

Many OPEC members are struggling with their higher production quotas because of technical issues, such as Nigeria, or because of political factors, such as Libya, which, to be fair, has been exempted from any production cuts and can pump at will as long as the political situation in the country allows it. Recent outages took an estimated 500,000 bpd or more out of its total output.

Just how strong the upside potential for oil prices is right now is evident in the fact that although Libyan production is on the rebound, prices are not declining. The country's oil minister said at the end of last week that production was back to 1.2 million bpd. Yet Brent crude was trading at more than $86 a barrel at the time of writing, with WTI at over $84.

The reason for this is structural. The supply problem is not a temporary issue that can be fixed quickly or easily. First, there is the limited OPEC spare capacity, which has been on the decline for the past two years amid the pandemic. Second, there is the potentially more serious problem of underinvestment, this one driven not so much by the pandemic as by the ESG trend that has made shareholders a lot more demanding about companies' environmental credentials than their money-making abilities.

Apparently, however, end-consumers do not care as much about environmental credentials as shareholders. They care about having fuel for their cars, resulting in demand rising so steadily. Even the International Energy Agency had to backtrack from calls for the immediate suspension of all investments in new oil and gas production and instead call for more investments. According to the IEA, global oil supply is at least 1 million bpd below demand.

This is a gap that would be difficult to fill, even if the whole U.S. shale oil industry started drilling wells. First, because shareholders would lash out. Second, because even in the shale patch, it takes some time to drill enough wells to make a difference in international prices, especially when few other producers have the capacity to do the same.

There is little left to do for the White House and other decision-makers than sit and wait to see how the oil price game will play out. It is telling enough that OPEC does not want Brent to reach $100, per comments made by the oil minister of Oman.

"We're very careful at OPEC+, we will look at each month as we go," Mohammed Al Rumhi told Bloomberg in an interview last week. "But so far, I think 400,000 is good because demand is increasing and we want to make sure that the market is not overheating. We don't want to see $100 a barrel. The world is not ready for that."

Yet if OPEC is not ready to add enough production to keep the market well supplied, then the future of oil prices is out of the cartel's hands as well.

By Irina Slav for Oilprice.com

The Houthi drone attack on the United Arab Emirates triggered a swift escalation in one of the most important oil-producing regions globally, adding a hefty geopolitical price premium to markets that are already on edge over a potential Russian invasion of Ukraine. With Omicron failing to significantly dent global crude demand and recent reports suggesting that it is less likely to damage lungs than previous variants, oil prices shot up in the first two trading sessions of this week.

UAE Attack Sends Regional Tensions Flying. A deadly missile attack on ADNOC’s storage area in the industrial Musaffah area close to the Abu Dhabi airport triggered a sudden deterioration in the Arabian Peninsula’s security climate, making further attacks likely.

The US Mulls Europe Gas Contingency Plans. US authorities have held talks with several oil and gas majors on contingency plans for supplying natural gas to Europe in case a Russo-Ukrainian military conflict breaks out and disrupts pipeline flows from Russia.

Libyan Oil Production Comes Back. Following last week’s restart of four crude and condensate fields in Libya’s western regions, the North African country has seen its production move to 1.2 million b/d. This brief respite doesn't change the fact that future disruptions remain likely as a general lack of funds makes proper maintenance difficult.

OPEC Sees 2022 Oil Markets as Well Supported. The most recent issue of OPEC’s monthly report reiterated the oil group’s view that oil markets will remain well supported over 2022, with global demand rising 4.15 million b/d year-on-year, surpassing the 100 million b/d mark in Q3.

UK Court Ruling Dismisses Climate Activists. A UK High Court dismissed claims from climate activists that the country’s oil and gas regulator unlawfully assessed oil and gas projects on a pre-tax basis, setting a precedent for further activist-driven cases vis-a-vis the UK government.

Gazprom Still Doesn’t Supply Gas via Yamal Pipeline. After one month of reverse flows via the Yamal pipeline, Russian gas giant Gazprom sent shockwaves across Europe again by not booking any gas capacity to Europe through Yamal in February 2022.