Energy Prospectus

Opening Prices:
> WTI is down $1.52 to $102.73/bbl, and Brent is down $1.57 to $107.21/bbl.
> Natural gas is up 7.9c to $7.076/MMBtu.

AEGIS Notes
Oil

Oil declined after a two-day rally but is still set for a weekly gain after rising almost 11% in the past two days
> Traders have experienced continued volatility as competing market forces make it difficult to pin down the proper value for oil
> In the short-term, recent reserve releases by oil-consuming nations, along with a virus resurgence in China, have weighed on price
> Signs of easing Covid restrictions and China’s central bank mulling measures to help boost the Chinese economy have led to the recent rally

One of the few more bearish banks see Brent averaging $73/Bbl in 4Q (BBG)
> Citibank is neutral on crude in the near term, with risks skewed to the upside, according to the bank’s analysts Francesco Martoccia and Ed Morse in April 13 note. The bank lowered estimates for oil consumption growth globally from 3.6 MMBbl/d to 2.2 MMBbl/d
> U.S. supply growth is forecast to accelerate through 4Q, but unprecedented SPR sales should help bridge the time until then, loosening balances sooner, according to Citi

Natural Gas

Gas has continued to rally, and the prompt contract (MAY22) is now at its highest level since 2008
> Gas prices have been on a tear over the last few weeks as the market moves closer to summer
> The rally has been strengthened by colder weather forecasts earlier in the week, which would have prolonged withdrawals in certain regions
> Lower-48 dry gas production posted a 0.5-Bcf/d loss to bring the total to 93.3 Bcf/d
> LNG feedgas demand is at around 12.7 Bcf/d, with Calcasieu Pass holding near its record high of 0.81 Bcf/d

The rally has extended beyond just the near-term tenors, with the Summer ’22, Winter ‘22/’23, and Summer ’23 strips all posting week-over-week gains of 74c, 76c, and 28c at $7.25, $7.34, and $4.693 as of this morning

The EIA is expected to report 15-Bcf injection into inventories, according to the EIA
> This contrasts with the 55 Bcf increase in storage during the corresponding week of last year, and a five-year average injection of 43 Bcf
> If the 15-Bcf build in inventories Is confirmed, total inventories would swell to 1,397 Bcf, while the deficit to the five-year average would increase to 303 Bcf

(Reuters) – U.S. oil production forecasts are being revised upwards despite labor and supply chain constraints as higher prices spur more drilling and well completion activity, according to industry experts.

Calls for new oil supplies are being answered by more producers as U.S. prices stay above $100 per barrel, propelled by Russia’s invasion of Ukraine. Prices are up 70% year-over-year, offsetting worries of a second pandemic price drop and inflation.

U.S. output will end the year up 1.29 million barrels per day (bpd), at 12.86 million bpd, according to consultancy East Daley Capital, which closely tracks energy supplied to U.S. pipelines. Its latest forecast increase is roughly 300,000 bpd, or 23%, higher than in its December outlook. < This would put U.S. production back to pre-pandemic level. I think this is wishful thinking. May be possible by the end of 2023.

The bulk of the projected annual rise – 1.13 million bpd – comes from the Permian Basin, the top U.S. shale field that has propelled the United States to an energy powerhouse. There were 332 oil rigs drilling there last week, the most since April 2020.

“U.S. oil prices are $30 to $40 per barrel higher” than late last year and “rig counts are becoming more responsive” to that price movement, said AJ O’Donnell, a director at East Daley Capital.

PROFITS AT HALF THE LEVEL

At $104 per barrel, oil is roughly twice what Permian Basin producers said was needed to profitably drill wells, according to a Federal Reserve Bank of Dallas survey.

March filings for drilling permits there hit 904, a monthly high, which “reflects a robust expansion” for horizontal drilling in west Texas and eastern New Mexico, said Rystad Energy.

Shale firms also are tapping drilled-but-uncompleted wells, standbys that can be quickly added to production. The number of such wells fell in February to 4,372, the lowest since 2013, U.S. data shows.

On Tuesday, pipeline operator Enterprise Products Partners forecast U.S. oil production to reach 12.4 million bpd by December, up 800,000 bpd from a year ago, and within 5% of the pre-pandemic record. < More realistic.

“There are 9 million productive acres that we’ll call Tier 1 through Tier 4,” based on potential output, Tony Chovanec, a senior vice president, told analysts. “With $80 oil, we think 2 million acres moves from lower tier to top tier economics.”

LIMITS TO GROWTH

Private companies have ramped up activity as major oil companies focus on cutting debt and increasing shareholder payouts. Publicly traded companies vowed to improve returns after years of overspending.

Compared to oil’s gains, U.S. rig count increases so far look “anemic,” said Tim Roberson, co-founder of Texas Standard Oil, pointing to spending restraints, investor cash going to renewable energy and industry supply-chain problems.

But, he said, “the second half of the year, it would be likely that the pace of drilling picks up” as supply chain problems are either resolved or reduced.

Hess Corp recently said it would strongly consider moving up the timeline for adding a fourth rig to its North Dakota operations if prices remain elevated.

Not everyone expects robust gains. The U.S. Energy Information Administration (EIA) this week left unchanged its outlook for an 800,000 bpd increase to 12 million bpd this year. BTU Analytics, a Factset Company, puts U.S. output rising by 962,000 bpd to 12.2 million bpd by the year-end, slightly down from a prior forecast.

“We’ve been bullish on supply since the fourth quarter of last year. It has been slow to show up,” said Al Salazar, a senior vice president at Enverus, which expects U.S. output to exit the year 1 million bpd higher than 2021.

After declining during the pandemic, oil production began rising in March. Output stayed at 11.6 million bpd for nearly two months then rose to average 11.8 million bpd so far this month, according to the EIA.

“Further near-term upside is limited by tight labor markets and shortages for materials like steel and sand,” said Matt Hagerty, a BTU Analytics senior analyst.

Closing Prices:
> Prompt-Month WTI (May 22) was up $2.70 on the day, to settle at $106.95.
> Prompt-Month Henry Hub (May 22) was up $0.303 on the day, to settle at $7.300.

If my prediction that we get to the end of May with ngas in storage 350 Bcf below the 5-year average comes true, I think we do have a good shot at $10/MMBtu gas prices in Q3.

Oil prices are more of a "guess" at this point. Tight global oil market, but a lot of variables.