Energy Prospectus

Opening Prices:
> WTI is up $0.64 to $82.58/bbl, and Brent is up $0.48 to $88.48/bbl. < Up $1.83 at time of this post.
> Natural gas is down -1.9c to $7.823/MMBtu. < Up $0.14 at the time of this post.

AEGIS Notes
Oil

Oil lost nearly 6% yesterday to reach a seven-month low
> China extended lockdown measures have fueled concerns of falling appetite or demand for crude oil from the world's largest consuming nation
> ECB announced a 75-basis point rate hike at today's meeting, and the market will be eagerly watching remarks made by the ECB and Fed Chair Powell later today
> Meanwhile, The USD Index (DXY – a proxy for USD strength against a basket of other int’l currencies) reached its highest level since 2002
> A more expensive dollar can cause foreign buyers of dollar-denominated commodities to pay more for the same amount of goods

The Chinese city of Chengdu extended lockdowns indefinitely in most of its downtown regions in an effort to curb new Covid cases
> The city of 21 million residents reported 116 new cases on Wednesday, up from 90 on Monday
> City officials announced that mass testing and restrictions, including the closure of non-essential businesses and schools, will continue

OPEC+ may need to cut production deeper, said JP Morgan in a report, as oil prices have fallen further after the symbolic output decrease agreed on September 5 (BBG)
> "We believe further intervention may be necessary and suggest a cut of up to 1 MMBbl/d may be needed to stem the downward momentum in prices and realign physical and paper markets, which appear disconnected," wrote Christyan Malek, global head of energy strategy at JPM
> On Monday, OPEC+ agreed to reduce their output by 0.100 MMBbbl/d in October

Natural Gas

The EIA will release its storage report for the week ending Sep. 2
> The median estimate is for an injection of 55 Bcf, while the Bloomberg survey ranges from 47-66 Bcf; last week’s storage change came in at 61 Bcf
> The five-year average injection is 53 Bcf
> An injection of 55 Bcf would leave the U.S. working gas inventories at 2,695 Bcf, which would be 328 Bcf below the five-year average

U.S. power generation to reach record high in 2022 (EIA)
> Due to increased economic activity and hotter than average summer weather, the U.S. is expected to generate a record amount of electricity this year
> The EIA said that the share of power generation from natural gas will hold at 37% in 2022, the same as 2021, but is expected to fall to 36% in 2023
> The total amount of power generated in 2023 is expected to fall by 1%
> While natural gas generation is set to decrease next year, power generation from renewables is expected to increase from 22% to 24% < More dependence on wind and solar = more power outages.

UK's new Prime Minister Liz Truss, lifted a ban on shale gas fracking today, to help increase domestic energy supplies in the face of rising costs and a supply shortage (BBG) < FINALLY someone with a brain!
> Truss expects that the newly lifted regulation will increase gas supplies within the next six months despite some local opposition and may enable developers to " seek planning permission where there is local support"
> Additionally, Truss is also expected to proceed with issuing more North Sea exploration licenses

From one of our very smart members

The European Central Bank (ECB) hiked its benchmark rate by +0.75% this morning. It’s the second rate hike by the bank, and the rate stands at 1.25%.

The US Dollar remains a central focus point for the markets. Yesterday, the British Pound hit a 37-year low against the dollar (1 GBP = 1.14 USD). The Japanese Yen is at the lowest exchange rate in 24 years (1 USD = 144 JPY).

A super strong dollar hurts “risk on” assets around the world. It also makes inflation a bigger problem as most commodities are priced in dollars. (It does no good if the price of oil, grains, etc. drop -30% but your currency drops by -50%.)

The Fed’s next interest rate decision is on Sep 21st. Before the meeting, the markets will focus on the CPI (Consumer Price Index) and PPI (Producer Price Index) which come out on the 13th and 14th respectively.

Even though energy costs have come way down since March (oil is down from 130 to 82.50), oil is still up 35% in year-over-year terms. It won’t be until Feb or March of next year before oil and other commodities make negative contributions to the inflation numbers.

The main drivers of inflation going forward are going to be Owner Equivalent Rent (OER), labor, and other ancillary components. These components tend to lag energy and remain stickier for longer. (i.e., think that inflation will remain higher for longer but at a lower rate than what we’ve seen over the last few months)

The recent drop in energy prices (oil and natural gas) hasn’t helped Europe that much. Today, the UK Treasury announced that it’s setting up a £40 billion fund with the Bank of England to help energy companies access extra liquidity they need to deal with energy prices. Germany and France have had to help their utility industries. (Of course, Europe has a different set of problems compared to the US. Europe depends heavily on Russia for energy.)

Closing Prices:
> Prompt-Month WTI (Oct 22) was up $1.60 on the day, to settle at $83.54
> Prompt-Month Henry Hub (Oct 22) was up $0.073 on the day, to settle at $7.915

We still have a global energy crisis. Very low space heating fuel inventories heading toward winter.