Energy Prospectus

Opening Prices:
> WTI is down $0.41 to $80.81/bbl, and Brent is down $0.40 to $86.48/bbl. < WTI traded up to $81.57 at the time of this post
> Natural gas is down -22.7c to $6.511/MMBtu.

AEGIS Notes
Oil

Oil set to post a weekly gain ahead of the OPEC+ meeting and the EU’s ban on Russian oil
> WTI trades above $80/Bbl amid concerns about tighter supply and a weaker dollar < U.S. crude oil inventories are now outside the bottom of the 5-year range for this time of year.
> OPEC+ is scheduled to meet on Sunday and is widely expected to maintain its current production level
> It'd be bullish for oil if OPEC+ decides to cut production, as it would coincide with the EU's ban on Russian oil (Dec 5)
> Additionally, China hinted at easing its strict Covid-zero policy, a sign of higher demand should China fully reopen
> A $60/Bbl price cap on Russian crude was tentatively agreed upon by the EU yesterday ahead of the deadline on Monday, although Poland still has not confirmed the agreement
> The USD Index (DXY – a proxy for U.S. Dollar strength against a basket of other international currencies) fell to its lowest in five months this morning. A weaker dollar (DXY Index) can cause foreign buyers of dollar-denominated commodities to pay less for the same amount of goods

The EU closed in toward a $60/Bbl price cap for Russian crude yesterday after some nations objected to levels around $62-$70/Bbl (BBG)
> Poland continues to be a hurdle to a unanimous agreement as they want new sanctions related to the cap, and sources said that talks would continue
> Additionally, the bloc is allegedly debating a mechanism that would allow regular evaluations and potential revisions of the cap every two months starting in mid-Jan 2023
> There should be agreement that any future adjustments to the cap should lower it by at least 5% from the average market rates, according to two sources
> The Urals grade fell to as low as $45.31/Bbl this week, which is still lower than the potential $60/Bbl cap, according to Argus
MY TAKE: EU's Price Cap on Russian oil is just political noise and more likely to make the energy crisis in Europe worse.

The Biden administration is reportedly considering stopping crude sales from the SPR (BBG)
> The DOE intends to postpone or cancel the sale of 147 MMBbl of oil for the fiscal years 2024-2027
> “It doesn’t make sense for us to be releasing oil while we’re trying to refill the SPR”, said Doug MacIntyre, deputy director of the Office of Petroleum Reserves < This guy actually gets paid a nice salary to make brilliant statements like this.
> The proposal would need congressional approval and might be incorporated into a government funding bill that could come together this month

Natural Gas

Prompt month natural gas prices are lower by 3.75% this morning to $6.48
> The Summer ’23 seasonal strip is down 20c to $5.14, and the Winter ‘23/’24 strip is lower by 16c to $5.63
> Yesterday the EIA announced an 81 Bcf withdrawal from storage for the week ending November 25.
> The five-year average weekly withdrawal for this time of year is 32 Bcf.

Dan - You probably saw this bearish natgas commentary in Barrons - from Portillo Tudor..

But the picture next year looks more dour. Prices could be cut in half by the middle of the year, and reduce returns for American gas producers, predicts Matt Portillo, an analyst at Tudor, Pickering, Holt. Portillo lowered his ratings on EQT (ticker: EQT), Antero Resources (AR), and Coterra (CTRA) to Hold from Buy. Those companies are up 91%, 102%, and 40%, respectively, this year.

Natural gas is used primarily for heating and electricity, so a particularly cold winter could still cause prices to rise more this year. But after the winter, a lull may set in.

“We may be early as there is still plenty of potential winter weather ahead, but under a normal weather scenario over the next 18 months, we continue to see significant downside risk” to natural-gas prices, Portillo wrote.

Closing Prices:
> Prompt-Month WTI (Jan 23) was down $-1.24 on the day, to settle at $79.98
> Prompt-Month Henry Hub (Jan 23) was down $-0.457 on the day, to settle at $6.281 < Chicago 52 at 7pm today and forecast is 12 at 7am on Saturday. < Storage report for the week ending December 9 could be a draw over 200 Bcf, which would be the largest December draw in more than ten years.

If ngas storage goes below 3,000 Bcf by year-end, it will probably go below 1,000 Bcf by the end of March. That will keep natural gas prices high because refilling storage is not optional. Let's let Miss La Nina do her thing.

NatGas going to $10 was one of the...wait for it.....'safest bets' that analysts were calling for just a few months ago. Europe's energy crisis ignited fears of a global contagion that all but ensured that all forms of energy would soar. So what went wrong? Wise ng companies used every opportunity to buy ng and add to storage ahead of the start of winter. Mother Nature accommodated with a very mild US fall season, and so far, an even milder early intro to winter. The already under-developed export facilities for LNG joined the party by, sadly, seeing one of its facilities explode and go offline until repairs are complete. And China's ongoing lockdown has bolstered the 'demand destruction' argument for lower everything-prices! So here we are reading about expectations of $3 ng pxes in '23!!! I might be alone on this one, but I'll take the other side of that one! We're just one or two arctic blasts away from that $3 target being revised back up to $8 or $9!! A deeper dive into the weeds might alarm some folks as to how much ng development is likely to go on in the face of a regulation-heavy Administration, limited infrastructure to transport nationally and higher (and likely getting even higher) cost of capital. Part of me hopes the $3 target is, at least, approached, because it will make later dated call options struck at $7 or $8 real cheap to load up on! (NOT ADVICE! JUST FOOD FOR THOUGHT AND DISCUSSION!)

Barrons article

By the second half of next year, Portillo expects U.S. natural-gas prices to fall to around $3 per million British Thermal Units, from over $6 today.

The problem is that supplies of natural gas have continued to rise, but demand hasn’t risen enough to meet it. The U.S. now produces about 101 billion cubic feet (BCF) of natural gas per day, but demand is stuck around 98 BCF, Portillo said. Supplies are expected to be up about 5 million BCF by the end of December, compared to last year. And while supply may stay flat for the first half of 2023, it’s expected to ramp up in the second half of the year, adding as much as 4 BCF more per day by the end of 2023. 

Our view is that gap needs to collapse toward $3 or less in the second half of 2023, to effectively shut down supply growth in the first half of 2024, before you get LNG kicking in heading into 2025,” Portillo said in an interview.

New LNG export capacity is expected to come online in 2025, allowing the U.S. to sell more supplies overseas. The growth in natural-gas shipments should lift U.S. prices back to $6 or even $7 in 2025, Portillo predicts.

or natural-gas producers, weak near-term prices could significantly hurt their returns, and ability to boost dividends and buybacks. There’s an added concern for some companies who are particularly exposed to market prices next year. Natural-gas companies have historically hedged their production aggressively by locking in futures pricing. Those hedges hurt their returns earlier this year, because they had already locked in lower prices when natural-gas futures spiked. In response, several have been using fewer hedges, Portillo said. That leaves them more exposed if prices fall. Antero, Comstock Resources (CRK), and Coterra are among the companies that have fewer hedges, Portillo said.

He thinks there’s still time for companies to add hedges, however, and put themselves in better shape ahead of the downturn.

“We continue to believe a more aggressive stance on hedging the strip would be beneficial as it would lock in strong free-cash-flow yields and mitigate near term risk while allowing investors to own equities through the cycle to play for upside in 2025+,” he wrote.

And the downturn should set up a buying opportunity.

“Stocks tend to trade with movement in the 12-month [futures] strip,” Portillo said. “We think there’s probably on average 30% to 40% downside risk if the macro environment plays out [as we expect]. But that will create a fantastic buying opportunity as we head into 2025.”