Energy Prospectus

Opening Prices:
> WTI is up $0.99 to $100.49/bbl, and Brent is up $1.64 to $104.41/bbl.
> Natural gas is up 14.9c to $5.672/MMBtu.

AEGIS Notes
Oil

West Texas Intermediate steadied near $100/Bbl on Wednesday morning, following over an 8% decline yesterday
> Tuesday’s price drop was tied to concerns around a global recession with little actual change in the fundamentals
> Traders were in risk-off mode, especially in commodities, as the U.S. dollar climbed to new decade highs

Major Wallstreet banks differ on the future direction of crude oil prices
> Goldman Sachs remains bullish: “While the odds of a recession are indeed rising, it is premature for the oil market to be succumbing to such concerns,” Goldman Sachs analysts, including Damien Courvalin said “The global economy is still growing, with the rise in oil demand this year set to significantly outperform GDP growth.” (GS)
> Citibank, on the other hand, sees it in a different way: "Oil could collapse to $65/Bbl by the end of this year and slump to $45 by the end of 2023 if a demand-crippling recession hits (Citi)." “For oil, the historical evidence suggests that oil demand goes negative only in the worst global recessions,” Citi analysts said in the July 5 note. “But oil prices fall in all recessions to roughly the marginal cost.”

MY TAKE: It is going to take a significant and long recession to pull oil back to $65/bbl. Some of you may remember that heading into 2021 I repeatedly said that "The Right Price" for WTI was $65/bbl. You may also remember that at that point in time we were still in "Pandemic World" and OPEC+ had a significant amount of spare capacity. Today the global economy is still working to restore our supply chain problems that will require a lot of diesel and OPEC+ is totally out of spare capacity. Also, we have a war in Ukraine and 1-3 million barrels of Russian oil will soon be off the market. The new "Right Price for Oil" may not be as high as Goldman Sachs' prediction of $145/bbl, but it certainly is not $65/bbl. IEA's next Oil Market Report (next week) will be interesting.

Natural Gas

U.S. natural gas futures are up this morning, trading near $5.672
> Lower-48 dry gas production fell by 0.8 Bcf/d overnight and is currently near 96.6 Bcf/d < Remember that this is just a guess.
> South Central temperatures are forecast to hit their highest so far this summer which has led to bullish demand forecasts for gas in the region for power
> ERCOT is forecast to set a new record for total electricity load, easily topping the July 2020 record highs

Ukraine has 11 bcm of natural gas in underground storage versus its target of 19 bcm
> The Chief Executive of the transmission system operator says, “this winter will probably be the most difficult in our history”
> Analysts do expect the country’s gas consumption to fall to around 21-22 bcm this year, in contrast to around 30 bcm of gas on average
> Ukraine’s economy is expected to shrink by one-third due to the impacts of Russia’s invasion

The Energy Report: Recession Session
By Phil Flynn(Jul 06, 2022 11:11AM ET)
My comments are in blue.

This is what a recession might feel like. Oil prices crashed as recession fears overtook concerns about near-term tight supply against a backdrop of reports that China was imposing more testing for COVID. Shanghai launched mass testing for COVID in nine districts. The crash across the commodity complex came quickly after the market seeming started to recover before a massive selling wave came in. That type of selling is inspired by a lack of confidence that the U.S. has a coherent economic or trade plan other than blaming gas station owners for the current prices. Yet, there is no doubt the oil market is sensing some demand destruction at recently elevated price levels. The market still must account for more risk to supply. Some of that risk is again coming from Russia.

Reuters reports that the Caspian Pipeline Consortium (CPC), which takes oil from Kazakhstan to the Black Sea via one of the world’s largest pipelines, has been told by a Russian court to suspend activity for 30 days, although sources said exports were still flowing. CPC, which handles about 1% of global oil, said the ruling to suspend operations related to paperwork on oil spills and said the group, which includes U.S. firms Chevron (NYSE:CVX) and Exxon (NYSE:XOM), had to abide by Tuesday’s court ruling. This story should help bring the market some support, but the moves in oil are more based on emotions right now than reality.

FEAR is a powerful emotion and hard to overcome even with the bullish news in the paragraph above.

Reuters is reporting that China is still trying to corner the Russian crude oil market. China is the world’s top importer of crude and June imports of Russian oil — including seaborne shipments and pipeline supplies — are set to total about 2 million barrels per day (bpd), or 15% of China’s crude demand, on par with May’s record volume. This comes as the AP reports that Secretary of State Antony Blinken will see his Chinese counterpart this week at a meeting of foreign ministers from the Group of 20 blocs of nations that will likely exacerbate splits over Russia’s war in Ukraine.

Another factor that the traders will watch today is the Fed Minutes. Part of what’s going on with the oil price crash is concern that the Fed will be too aggressive in raising rates thereby killing oil demand and pushing the economy into a recession.

At the same time, people are concerned about demand destruction because of high prices. Peripheral talk about weaker-than-expected demand over the 4th of July holiday also spurred some of the selling.

Is it possible that consumers have had enough and they’re going to cut back in a significant way? We do know that some people are being forced to cut back there’s absolutely no doubt about that that’s why the American Petroleum Institute report today will be big as we get an indication of how demand is holding up.

A sad note. OPEC Secretary-General Mohammad Barkindo, an oil industry veteran who steered the group through the creation of the OPEC+ alliance, has died in his native Nigeria, according to officials as reported by Bloomberg.

Natural gas is struggling to find a bottom. EBW analytics says that the front month spiralled lower last week as a bearish EIA storage report was followed by a PHMSA report suggesting an extended outage at Freeport LNG. With little physical support, the August contract crumbled. Natural gas is searching for support, and technicals remain indicative of further selling pressure ahead. Although nearing technically oversold conditions, the August contract may continue to probe lower over the next 7-10 days. In the medium term, the potential for returning heat into August, startup of Shell’s ethane cracker, rising coal prices, and bullish shape of the natural gas demand curve collectively favor a mildly bullish tilt to the 30-45 day outlook. With Freeport’s extended 2.0 Bcf/d outage lifting the storage trajectory through winter 2022-23, though, prices may struggle to regain recent heights near term. I think whenever the Freeport LNG facility does comeback online, right at the beginning of the winter heating season, it will push up ngas prices.

Closing Prices:
> Prompt-Month WTI (Aug 22) was down $-0.97 on the day, to settle at $98.53
> Prompt-Month Henry Hub (Aug 22) was down $-0.013 on the day, to settle at $5.510

$96.40 was a key support level. It didn't stay their long and moved back over $98 early in the afternoon. Tomorrow's EIA Petroleum Report will determine of WTI can move back over $100.