Energy Prospectus

Opening Prices:
> WTI is down $0.85 to $88.06/bbl, and Brent is down $0.87 to $94.49/bbl.
> Natural gas is down -29.2c to $5.846/MMBtu.

AEGIS Notes
Oil

Oil trades lower amid concerns of weaker demand
WTI is down nearly 5% this week and is currently trading around $88/Bbl
Increasing viral outbreaks show the challenges China’s Covid-zero plan is facing despite its widespread lockdowns and testing
Cases in Beijing reached their highest level in more than five months
Concerns about economic growth and demand disruptions continue to grow as the country upholds its strict Covid-zero policy

IEA director Fatih Birol criticized OPEC+'s decision to cut oil output last month, saying it will worsen the outlook for countries headed toward a recession
“The recent decision of OPEC+ to cut the production by 2 MMBbl/d was definitely not helpful,” said Birol at the COP27 summit
He added that the move might require a "rethink" because it is fueling inflation, particularly in developing nations

The EU and Asia rush to secure Middle Eastern oil for 2023 as sanctions on Russian crude approach (BBG)
Starting on December 5, the purchase of seaborne cargoes from Russia will be banned for almost all companies in the EU
Refiners in Europe and Asia are trying to maintain or increase the volume they receive from the Middle East amid speculation that Russian exports will fall as the sanctions come into effect
Officials in Asia say that their requests have been met. There is, however, no assurance that every buyer will be so fortunate given that the region's producers, including Saudi Arabia, have committed to reducing output
The uncertain factor, however, is still the bleak demand outlook driven by recessionary pressure and ongoing viral lockdowns in China

An isolated fire broke out last night at Chevron’s 269 MBbl/d refinery in El Segundo, California, that was extinguished within two hours (Reuters)
The cause of the fire and the equipment affected is still unclear; The El Segundo refinery supplies 20% of the motor vehicle fuel and 40% of the jet fuel used in southern California, according to Chevron’s website
The fire at the Chevron facility came after many of California’s refineries were partially down in October due to planned maintenance work

Natural Gas

Natural gas prices are down 5% this morning
Prompt month prices have fallen nearly 20% from the multi-week high made on Monday
The Summer ’23 seasonal strip is lower by 16 cents to $4.71, while the Winter ‘23/’24 strip has declined by 13 cents to $5.29

Freeport LNG restart could be delayed until December (BBG)
Freeport has been guiding towards a mid-November restart of the LNG export facility, however, based on a November 3 meeting between the company and US regulators, the restart may be delayed further
Last week Freeport submitted its root cause analysis to regulators, which documents their findings on the cause of the fire, however, Freeport must still request authorization to restart
Based on aerial imagery, some construction work is still being performed at the site, according to data provider Genscape

Cheniere asks regulators for more time to upgrade turbines (Reuters)
The largest US LNG exporter is requesting that Louisiana regulators give them 18 months to upgrade their turbines that currently exceed emissions requirements
Cheniere said that the upgrades are not expected to have a material effect on the companies’ operations despite about half of their Louisiana turbines failing emissions standards
The upgrades are expected to be completed by April 2024

This could take to next April with retards involved

Closing Prices:
> Prompt-Month WTI (Dec 22) was down $-3.08 on the day, to settle at $85.83
> Prompt-Month Henry Hub (Dec 22) was down $-0.273 on the day, to settle at $5.865

IMO today markets and commodities sold off because we did not get the "Red Wave" that was expected.

I was interviewed on a national radio show this morning and here are the notes that I spoke from:

Global Oil Market
> Today it is "Tight" with very little untapped supply.
> Likely to get much tighter this winter, due to shortage of space heating fuels.
> Extremely low OECD Petroleum Inventories (oil + refined products) with likelihood of fuel rationing (diesel rationing in SE U.S. now)
> OPEC+ is in control, even with Russia at 10 million bpd the cartel has little spare capacity. OPEC+ production was 3.5 million bpd under quotas in August.
> U.S. supply growth unlikely with Team Biden in control

Pandemic caused a "glut" of oil that peaked in Q2 2020
> From mid-2020 to mid-2022 global petroleum inventories declined by 2 million bpd and the "glut" was wiped out by Q3 2021.
> We are now facing a "historic shortage" of oil.
> Commercial oil inventory gains in Q3 2022 are only because U.S. and OECD countries have drained strategic petroleum reserves.
> Today the U.S. SPR is lower than it was in 2005. < Draining the SPR cannot go on much longer.

OECD Petroleum Inventories based on Days of Consumption (DOC) is the Key Statistic to watch.
> Normal is 30 DOC
> Today at 27 DOC (even with lower demand in EU)
> Heading to 25 DOC by 2H 2023, which points to an oil price of $135/bbl
> It is important to note that in early 2008 WTI spiked to $147/bbl even with OECD inventories at more than 27 DOC and OPEC had a lot more spare capacity.
> Oil "rationing by price" is the only viable solution to this energy crisis.

Per IEA's October "Oil Market Report"
"The relentless deterioration of the economy and higher prices sparked by an OPEC+ plan to cut supply are slowing world oil demand, which is now expected to contract by 340 kb/d y-o-y in 4Q22. Demand growth has been reduced to 1.9 mb/d in 2022 and to 1.7 mb/d next year, down by 60 kb/d and 470 kb/d, respectively, from last month’s Report. World oil demand is now forecast to average 101.3 mb/d in 2023." < Where will another 1.7 million bpd day come from??? Outside of the U.S. there is no significant non-OPEC potential for supply growth.


This world runs on oil and demand growth is "RELENTLESS".
> IEA's demand estimate above considers lower Chinese demand due to "Covid Zero" policy and a mild global recession.

Wild Cards
> Sanctions on Russia could make oil shortage worse
> Cold winter in EU could require more natural gas to oil fuel switching for power generation, which could make oil shortage worse
> La Nina winter could be colder than normal and increase demand for heating oil
> U.S. dollar strength
> Covid or another dreamed up FEAR could cause more travel restrictions
> Iran, Venezuela, Libya, Nigeria, etc. < Lots of high risk oil supply countries.

Conclusion:
> There is nothing that I see other than the strong U.S. dollar and FEAR of recession that is keeping WTI under $100/bbl now.
> Raymond James' official forecast is that WTI averages $100/bbl in 2023 with risk of price spike to over $130/bbl sometime in 2H 2023.

I read that China announce they won't be buying anymore oil this year.
Then I read somewhere else, that exports to China are increasing in Q4 and tanker rates are soaring.

So, I conclude China is manipulating markets to drive the price down.
The FTX blow up, election disappointments, spilled thru the markets as people sold anything to meet margin calls

Small cap Canadian names got slaughtered today one name was down 20 %. Surge energy, which I own was down 8 % to 8.95 CAD below the 9.25 secondary offer price. OXY a large mid cap was down 9 % a 2 std deviation move

Note to self: Keep some dry powder to jump on market dislocations.

Alaska's exports to China are dropping to nil as they are buying discounted Russian oil instead. Cancellation of Keystone screwed Canada (and us) so they are building a pipeline to the west to export to China but they are getting all they want from Russia so I wonder if that is a factor to consider when investing in names up there.