Energy Prospectus

Opening Prices:
> WTI is down $2.62 to $105.59/bbl, and Brent is down $2.71 to $110.45/bbl.
> Natural gas is down -39.7c to $7.423/MMBtu.

AEGIS Notes
Oil

Oil prices traded lower as traders weighed more hawkish comments from the U.S. Federal Reserve officials (BBG)
> James Bullard, the Federal Reserve Bank of St. Louis President, said on Monday that the U.S. central bank shouldn't rule out rate increases of 75 basis points
> China promised to restore its economy after lockdowns disrupted growth, likely leading to a sharper recovery there

Operators in the Permian basin have chewed further into their supply of ready-made wells for the 20th straight month (Bloomberg)
> The number of DUC wells stood at 1,309 last month, according to the EIA’s drilling productivity report < Includes a lot of "Dead DUCs" that will never be completed.
> The reduction in DUCs leaves the U.S.'s most prolific basin with the smallest inventory of low-cost wells in more than half a decade

Natural Gas

Gas prices are down by 39.7c, to trade near $7.423
> The forecasted gas-weighted heating degree day total increased by 2.8 HDDs to 366 HDDs, its highest mark since 367 last Monday
> Lower-48 dry gas production has stayed near 94 Bcf/d. However, Appalachian production has been rising and is now at 33.8 Bcf/d, its highest since early January

Shortages, supply chain issues to hamper lower-48 dry gas production growth
> Lower-48 oil and natural gas production will not be able to respond to current market prices, thanks to supply chain issues, and material and labor shortages
> Traditional lending and capital markets access for exploration and production companies are down across the board over the last several years and historically low, and ESG pressures are exacerbating the issue
> The Appalachian region has seen the largest growth over the last ten years, but the region is now in desperate need of takeaway capacity, which will limit its growth until the arrival of the Mountain Valley Pipeline (MVP)

The EIA forecast higher output in the Haynesville and Appalachian regions
> According to drilling productivity report (DPR) modeling, natural gas output should climb by 721 MMcf/d from April to May
> The Appalachia region should increase by 197 MMcf/d, the Bakken by 27 MMcf/d, Eagle Ford by 110 MMcf/d, and the Permian by 154 MMcf/d, according to the EIA’s model
> The Haynesville basin is expected to see the most growth at +245 MMcf/d
> AEGIS notes that drilling activity in the Haynesville has been rising lately and is at its highest level since 2012, with 67 rigs
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I continue to think that Comstock Resources (CRK) is the best choice among the large-cap gassers in the Sweet 16. I believe the Haynesville is the only basin with significant near-term production upside because the other major basins still have limited pipeline space.

The IMF cutting the global economy’s 2022 outlook by 0.8% compared to its previous forecast is the main talking point in markets today - after seeing strong demand across all commodities in Q1, we are now facing the reality of protracted demand loss going forwards. The Russia-Ukraine war has sent shockwaves across the metal and agriculture markets, potentially having an even larger impact on global markets than a Russian oil embargo would. Against this background, not even Libya’s descent into another period of chaos could hold oil prices above the $110 per barrel mark.

Libya Supply Disruption Puts Europe on Alert. Libya’s national oil company has seen a ‘painful wave of closures’ and declared force majeure on exports from the Zueitina, Mellitah, and Sarir terminals amidst skirmishes, having been forced to shut down production at the country’s largest field, Sharara.

OPEC+ Gap Widens as Russia Starts Decline. Internal OPEC+ documentation showed that the oil group underperformed its March production target by a whopping 1.45 million b/d, bringing total compliance to 157%, with this month expected to see even wider discrepancies between output targets and actual production. < Even without Russia, the cartel is basically out of spare capacity that can be quickly brought online. Saudi Arabia and UAE have some remaining capacity, but their additions are being offset by other declines within the cartel.

Natural Gas pulls back, but still a dollar over what I am using in my forecast models.

US cash natural gas prices for next-day deliveries have soared this week, with many locations trading above $7 per mmBtu for the first time since the Big Freeze in February 2021.

- The Henry Hub May ‘22 contract has been on the rise recently, settling at $7.82 per mmBtu on Monday, though a downwards correction on Tuesday brought trading closer to $7 per mmBtu.

- The peculiarity of the gas price spike is that demand is expected to be easing over the next seven days and production remains stagnant at 93.4 BCf per day. < We do not have a near-term shortage, but the utilities and LNG exporters see where this is heading. The storage deficit to the 5-year average will keep growing as long as LNG exports remain near capacity. Lack of pipeline capacity in most areas make it impossible to refill storage before the next winter arrives, so utilities will have to outbid the exporters for supply.

- With domestic coal supplies remaining tight, disallowing any large-scale fuel switching, the longevity of the bull run will largely depend on LNG outflows from the US.

Closing Prices:
> Prompt-Month WTI (May 22) was down $-5.65 on the day, to settle at $102.56
> Prompt-Month Henry Hub (May 22) was down $-0.644 on the day, to settle at $7.176

If EIA's weekly petroleum report matches what API reported, WTI should firm up on Wednesday. There is so much "noise" that is keeping traders on edge. Volatility will continue but fundamentals point to higher oil prices this summer.

IMO natural gas prices got a bit ahead of the fundamentals. We have no natural gas shortage NOW, but we will heading into the next winter heating season.