Energy Prospectus

Opening Prices:
> WTI is down $4.67 to $97.40/bbl, and Brent is down $4.92 to $101.73/bbl.
> Natural gas is up 1.5c to $6.549/MMBtu.

AEGIS Notes
Oil

Oil prices dipped amid fears that the Covid-19 outbreak in China might dampen global demand
> WTI futures fell nearly 5% to $97.40., reaching its lowest level in nearly two weeks
> Shanghai promises to enforce Covid-19 limitations more strictly, which is estimated to result in a decrease in fuel use of about 20% in April
> That’s equal to a 1.2 million-barrel-per-day decline in crude oil consumption, the biggest drop since the Wuhan lockdowns

Russia has increased oil supplies to major users in recent weeks, defying its reputation as a global energy outcast
> Oil exports have risen to an average of 1.6 million barrels a day so far in April, according to TankerTrackers.com
> Russian crude oil production has decreased by around 7% since March, but the reported “self-sanctioning” has not shown up in satellite tracking data that tracks exports (OilX) < Keep in mind that "production" and "exports" are different stats. Exports can increase while production decreases by draining storage and by less domestic consumption.
> European governments have discussed imposing an oil embargo but have yet to take action

The threat of increasing interest rates in the United States also weighed on oil prices
> The Federal Reserve's chair has hinted that the central bank may boost short-term interest rates by twice as much as usual at upcoming meetings, beginning in two weeks
> The Fed has already raised its key overnight rate once, the first such increase since 2018, and further increases are expected
> AEGIS notes that a hawkish fed has traditionally resulted in a stronger US dollar, which is bearish for dollar-denominated commodities as fewer units of currency are required to purchase the same amount of goods

Natural Gas

Gas prices are up slightly this morning 1.5c, near $6.549
> Lower-48 dry gas production is down by 0.86 Bcf/d at 93.3 Bcf/d, as severe weather has led to a drop in Williston (Bakken) basin supply
> LNG feedgas demand is at around 12.1 Bcf/d. Freeport LNG flows are still reduced due to maintenance on train 1. The maintenance has been taking place since April 3, and had an original ending date of April 21, but now expects to be done by April 27
> AEGIS notes that there will likely be more maintenance in the coming weeks that will limit LNG feedgas demand
> The weather in April has been very bullish, coming in as the fourth-best, in terms of gas demand, since 2000. Early May forecasts also look supportive as warm weather is expected to affect the South-Central region, boosting cooling demand. < Take a look at the 10-day US weather forecast here ( https://weather.com/maps/tendayforecast ) and you will see that the West and Northeast will still be burning natural gas and home heating oil during the nights well into May. La Nina winters last longer. Also, colder than normal Mays usually result in more GOM hurricane activity August-October.

Schlumberger, the world's largest oilfield operator, anticipates up-cycle for several years
> The company commented on short-term fundamentals saying, "commodity prices are elevated as supply conditions continue to tighten due to the impact of capital discipline, consistent OPEC+ policy implementation, and the potential impacts of supply dislocation from Russia."
> CEO Olivier Le Peuch – CEO said, "The industry is responding to this high commodity price environment with accelerated short-cycle investment in North America, led by the private producers, and a gradual increase in investment by the public operators, albeit tempered by capital discipline and bottlenecks in capacity and supply chain."
> Baker Hughes (NYSE: BKR) had similar comments last week during its earnings call, saying, "to meet the world's energy needs in a responsible manner, we believe multiple years of spending growth will be required."
> AEGIS notes that there has been an increase in drilling activity over the last couple of months, but it remains uncertain when the increase in drilling will translate to higher production. Current U.S. oil, gas-directed drilling rigs are up by 60%, and 53% year-over-year at 549 and 144 < Keep in mind that during 2021 the U.S. was completing 150-200 more wells per month than were being drilled. We entered 2021 with a large inventory of DUC wells. That inventory is now below normal levels and there are very few "Good DUCs" left to complete. There are a lot of "Dead DUCs" in inventory that will never be completed. Also, the Marcellus/Utica play has limited pipeline capacity.

Headline "noise" is putting downward pressure on oil prices.

Trading Economics:
"WTI crude futures tumbled more than 6% to below $96 per barrel on Monday, extending a 5% decline from last week and hitting their lowest in nearly 2 weeks, amid mounting concerns that prolonged Covid lockdowns in China and rapid rate hikes in the US would weigh on global economic growth and fuel demand. China’s demand for gasoline, diesel and aviation fuel in April is expected to decline 20% YoY, Bloomberg reported, which is equivalent to a drop in crude oil consumption of about 1.2 million barrels a day. In the US, Federal Reserve Chair Jerome Powell indicated that a half-point interest rate increase “will be on the table” when the Fed meets in May to approve the next in what is expected to be a series of rate hikes this year. Meanwhile, investors remained cautious as the worsening crisis in Ukraine could pressure the EU to sanction Russian oil and spur another rally."

MY TAKE: U.S. and OECD petroleum inventories are too low and I expect them to go lower this summer. Despite draws from the U.S. Strategic Petroleum Reserve (SPR), U.S. commercial inventories are all well below the 5-year average of where they should be this point in the year. Distillate inventories (diesel and home heating oil) are 20% below the 5-year average. We need a lot of diesel to fix the supply chain problems and lots of homes in the Northeast will still be burning oil through the first week of May to heat their homes.
China still believes that lockdown's work to control the spread of the virus. Maybe they do for Asian people, but in the U.S. the states that restricted movement and gatherings had the highest infection rates. For the sake of the Chinese people, I hope the lockdowns don't last long.

Natural Gas

Trading Economics:
"US natural gas futures bounced back to $6.6 per million British thermal units, after hitting a two-week low of $6.3 earlier in the session and pausing a rout that erased roughly 20% off a thirteen-year high of $8.065 hit in the previous week, as traders continued to assess the outlook for demand. Weather forecasts point to cooler-than-usual weather this week, which should keep demand above the 5-year average for longer. Still, EIA inventory data revealed a 53 billion cubic feet injection (bcf) last week, much more than a median estimate of 37 bcf. For the year, the contract is up roughly 80%, as harsh wintry weather extended well into spring, causing domestic inventories to shrink well below the five-year average. At the same time, the US is exporting LNG cargoes at record levels, mainly to Europe, as the region scrambles to replace Russian gas."

MY TAKE: The U.S. natural gas market is an "island" in the global natural gas market, where ngas prices are 5X higher in Europe and Asia. To keep the European economy alive, we much keep our LNG exports near capacity all year. There is NO WAY that the U.S. can rebuild a depleted gas storage system and keep sending LNG to Europe; the numbers just do not add up. If we flip quickly from a cold start to May to a HOT June, I see HH gas prices going to $10/MMBtu in Q3. Plus, high coal prices push up the floor for ngas prices.

Closing Prices:
> Prompt-Month WTI (Jun 22) was down $-3.53 on the day, to settle at $98.54
> Prompt-Month Henry Hub (May 22) was up $0.135 on the day, to settle at $6.669 < Up to $6.88 in after market trading.

MY TAKE: Oil's pullback is based on the FEAR that Covid related lockdowns in China will go on for months. Commodity price pullbacks based on FEAR seldom last more than a few weeks. The global oil market is tight and going to get a lot tighter in Q3 unless you believe Russia is going to surrender and/or we go back into "Pandemic World". High coal prices, LNG exports near capacity and an expanding deficit of gas in storage to the 5-year average is going to keep HH gas prices over $6.00/MMBtu and a hot summer will push gas and NGL prices a lot higher. RRC, AR and EQT will announce strong Q1 results this week. RRC up first tomorrow after markets close.