Energy Prospectus

Opening Prices:
> WTI is up $0.22 to $86.74/bbl, and Brent is up $0.21 to $92.01/bbl.
> Natural gas is down -15.0c to $6.687/MMBtu.

AEGIS Notes
Oil

Oil holds gains ahead of today’s OPEC+ meeting
> OPEC+ Joint Ministerial Monitoring Committee recommends a 2 MMBbl/d output cut
> The ministers will discuss the JMMC's recommendation later on Wednesday before making a final policy decision
> Prices were also supported by an EU proposal for an eighth set of sanctions, which includes a price cap on Russian seaborne exports

OPEC+ is reportedly considering cutting its production by up to 2 MMBbl/d for today's meeting (BBG, Financial Times)
> Additionally, the group may discuss minor cuts of up to 1.5 MMBbl/d
> A delegate further added that any cutbacks would be calculated using the member nations' current baselines, given that several member countries are already producing below their quotas < All they are really doing is adjusting their "official quotas" to the reality that over 2/3rds of the cartel members have no hope of producing up to their quotas.
> The scale of impact would depend on how the production cut is divided among the member nations
> Additionally, the UAE is likely to support the substantial oil production cuts proposed by Saudi Arabia and Russia at Wednesday’s OPEC + meeting despite U.S. efforts to try to stop the deal

The EU reportedly approved a fresh set of sanctions against Russia today that includes a provision that restricts the export of Russian seaborne crude to third countries above an oil price cap (BBG)
> The legislation would also extend import restrictions on goods, including steel, as well as a ban on the provision of IT, engineering, and legal services to Russian companies
> The price cap contains provisions to lessen the effects that the sanctions will have on nations with significant shipping sectors, such as Greece
> EU Polish ambassador Andrzej Sados told reporters, "We have approved a new package of sanctions. It includes a price cap on Russian oil shipped to third countries and mechanism to avoid circumvention of sanctions.”
> However, Hungary's Foreign Minister Peter Szijjarto said that the new price cap on Russian oil will not apply to pipeline shipments
> The G7 is within weeks of announcing a formal cap on the price of Russian oil, according to a U.S. Treasury official
> The step will be announced “substantially before Dec. 5,” Ben Harris, U.S. Treasury’s assistant secretary for economic policy, said on the sidelines of the Argus European Crude Conference in Geneva on Tuesday

Natural Gas

Natural gas prices are down nearly 1% in the prompt-month, after rising by 8% yesterday < Up 8 cents at the time of this post
> Weather forecasts continue to indicate below-normal temperatures for the next two weeks, which should keep demand from the power sector relatively low
> Gas production has turned lower slightly, but has been trending steadily higher and reached new yearly highs this week around 101 Bcf/d

Tellurian chairman says cheap U.S. gas is gone (Reuters)
> Charif Souki, chairman of LNG company Tellurian said on Tuesday that “$4-$5 U.S. gas is something of the past,” and that “if you really want to justify an investment, you have to think of $10-$12”
> Souki cited the European energy crisis as the reasoning for the end of cheap gas, saying that LNG is the only solution to the supply issues in Europe

Europe may avoid disaster this winter but will find next winter to be harder (Reuters)
> High inventories and demand curtailments may ensure Europe has adequate natural gas supplies this winter; next winter's supply may be even scarcer
> The Nord Stream 1 pipeline was flowing for most of the 2022 injection season; with the damage to the pipeline, there may not be any flows at all in 2023
> The CEO of trading company Vitol said, “There isn't going to be enough energy, and there isn't going to be enough regasification for Europe to replace what we have lost from Russia” < Eastern Europeans will be burning furniture to survive by the end of February. I feel sorry for the trees. I wonder how the Climate Change Wackos will react when Europe's forests are gone.
> Russia supplied around 40% of Europe's gas needs last year, now it provides less than 10%

The Energy Report: Turning Point
By Phil Flynn
Oct 05, 2022 09:32AM ET

OPEC Plus is at a major turning point in oil history, and this might be remembered as the day the cartel took back control of the global oil market from the United States.

The U.S. shale revolution revolutionized not only the United States economy but rewrote the global energy world order putting OPEC on its heels and changing the group from an all-powerful cartel that could control oil prices to a group that was fighting for oil market share and fighting for its very existence.

Yet inexplicably, the United States started to turn its back on its own U.S. oil and gas industry. The Biden administration actively re-did what it could to reduce U.S. oil and gas production with new regulations and discouraging investment. Now OPEC is showing that they are back in charge and are going to dictate what happens with the global oil supply.

Early reports show that the United Arab Emirates has backed off its opposition to a bigger-than-expected production cut and will go along with Russia and Saudi Arabia with a potential 1.8-to-2-million-barrel cut. Because OPEC is under production, it probably will mean a real cut of 1.3 to 1.1 million barrels a day. Regardless, this is a major production cut, unlike anything we’ve seen before COVID, and will have a major impact on prices this winter.

All this OPEC drama overshadowed the fact that the American Petroleum Institute (API) reported a wildly bullish weekly supply report. The API reported that the crude oil supply fell by 1.770 million barrels. Gasoline supplies are down a whopping 3.474 million barrels and may be one of the reasons why we saw such a huge surge in our RBOB gasoline prices yesterday. Distillates also plunged by 4.046 million barrels, and Cushing inventories increased by 925,000 barrels.

This report will put more pressure on the Biden administration. Yes, they have to make a grand decision on how to respond to OPEC and their production cut. The administration has already said they will not consider additional releases from the Strategic Petroleum Reserve. That’s probably a no-brainer because, let’s face it, they’ve drawn down inventories about as far as they possibly can without creating a major disaster for the country. Now there is active talk about banning oil and product exports from the United States. That is only going to serve to create shortages in the U.S. because retaliatory measures that will be taken will leave many states in the union short of supply in California. Are you ready for $20 a gallon of gasoline? You’ll find out if we get an export ban.

This OPEC production cut is the reason why it’s so aggressive, not only as a slap in the face to the Biden administration but also to Europe for putting a price cap on oil and gas. I am sure OPEC is not very happy about that. It does disrupt the market, and on top of that, I think it also creates a situation where OPEC feels like they’re being singled out for Russia’s errors. I think, at this point, a price cap is going to be counterproductive.

At the same time, I think the Biden administration and their SPR releases are another reason why OPEC is aggressively cutting production. Biden’s vow to make Saudi Arabia a pariah insulted the country. You even have California Representative Ro Khanna calling them a third-rate nation. Is it any wonder why Saudi Arabia doesn’t jump when the Biden administration tells them to? So much for Biden’s fist bump with Crown Prince bin Salman, the fist bump heard around the world.

The Business Insider reported that Saudi Aramco (TADAWUL:2222) CEO Amin Nasser said Tuesday that the world is misreading the oil market. He says that current crude prices indicate that the market is focused “on short-term economics rather than supply fundamentals,” he said. Nasser also reiterated warnings that a pick-up in economic activity would erase spare oil production capacity. The world misinterpreted the oil market by worrying too much about a potential recession in the near future, according to Saudi Aramco CEO Amin Nasser. Current oil prices indicate a focus on “short-term economics rather than supply fundamentals,” he told the Energy Intelligence Forum in London on Tuesday.

The Saudi CEO makes a great point. The poorly planned green energy transition has caused massive underinvestment in oil and gas supplies leaving the world short. Today could be that turning point that gets us into a very strong secular bull market. Even with all the bullish news in the short term, we still have to worry about the value of the dollar and what the Federal Reserve may or may not do in the future. But in the short term, we believe that this market is definitely in a buy breaks mode. Prices should spike if the Energy Information Administration report is similar to what we saw from the American Petroleum Institute.

Natural gas had a bit of a recovery yesterday after some weakness due to seasonal factors. EBW Analytics reports that near-term fundamentals remain starkly bearish, with the production surge extending to fresh records to start October while LNG feedgas demand plunges 2.0 Bcf/d amid maintenance outages at Cove Point and Sabine Pass. Particularly weak spot pricing at Henry Hub, including deals done as low as $5.380/MMBtu on Monday, may indicate lingering near-term softness ahead. < The US natural gas market is always soft during the "Shoulder Season" because demand for power generation and space heating is always low in Sept/Oct. By early December it will become clear that the US natural gas market is very tight. LNG exports will ramp up just as real winter weather spreads across the country.

LONDON (Reuters) - Oil rose on Wednesday, building on gains in recent days as OPEC+ agreed its deepest cuts to production since the 2020 COVID pandemic, despite a tight market and opposition to cuts from the United States and others.

The cut could spur a recovery in oil prices that have dropped to about $90 from $120 three months ago on fears of a global economic recession, rising U.S. interest rates and a stronger dollar. < Brent up $1.87 to $93.67/bbl at the time of this post.

Oil had been rising this week in anticipation of the cuts, said Fiona Cincotta, senior financial markets analyst at City Index.

"The real impact of a large cut would be smaller, given that some of the members are failing to reach their output quotas," Cincotta added.

In August, OPEC+ missed its production target by 3.58 million bpd as several countries were already pumping well below their existing quotas.

"We believe new output targets will mostly be shouldered by core Middle East countries, led by Saudi Arabia, the UAE and Kuwait," said Rystad Energy's analyst Jorge Leon.

The United States was pressing OPEC+ producers to avoid making deep cuts, a source familiar with the matter told Reuters, as President Joe Biden looks to prevent a rise in U.S. gasoline prices ahead of midterm congressional elections on Nov. 8. < Saudi Arabia is sending a message to Team Biden, "Don't expect OPEC to fix your stupid energy policies".

Biden has been grappling with gasoline prices all year and after a spike, they have eased, something his administration has touted as a major accomplishment.

Wednesday's agreement by OPEC+ in Vienna would "send a strong message that the group is determined to support the market," ANZ Research analysts said in a note, adding that it "would significantly tighten the market".

U.S. crude oil stocks fell by about 1.8 million barrels for the week ended Sept. 30, according to market sources citing American Petroleum Institute figures on Tuesday.

A rise in the U.S. dollar has also put pressure on crude prices as it makes oil more expensive for buyers holding other currencies.

Closing Prices:
> Prompt-Month WTI (Nov 22) was up $1.24 on the day, to settle at $87.76
> Prompt-Month Henry Hub (Nov 22) was up $0.093 on the day, to settle at $6.930

My forecast that WTI would average $95/bbl in Q4 looked bad a week ago and now it might be too low. When the SPR draws stop, WTI will go over $100/bbl quickly.

When the first real winter cold waves arrive, HH natural gas will push up to $9.00 or more, assuming that LNG exports ramp back up to 14 Bcfpd.