Energy Prospectus

Opening Prices:
> WTI is up $0.01 to $79.54/bbl, and Brent is down $0.25 to $84.08/bbl.
> Natural gas is down -50.2c to $4.78/MMBtu.

AEGIS Notes
Oil

Oil falls from a three-week high amid low liquidity
> Feb ’23 WTI is trading marginally higher this morning, around $79/Bbl
> Russia responds to the G7 price cap with an oil sales ban
> The market continues to weigh China’s reopening despite a surge in new Covid cases
> There are ongoing concerns about how smoothly China will reopen and if the nation can maintain the eased restrictions
> AEGIS notes that oil demand could see an uptick in the world’s largest oil importer after the initial Covid waves

TC Energy has received regulatory approval to restart the remaining segment of the Keystone pipeline; however, the company said work could take “several days” to bring it online

Russia bans oil sales to countries that comply with the G7 price cap (BBG, WSJ)
> Putin banned the export of oil and oil products to foreign buyers yesterday who accept the price cap mechanism
> The restrictions on crude are scheduled to come into effect on February 1 and last through July 1, 2023
> A separate ban on refined oil products like gasoline and diesel would go into effect at a later announced date
> According to the decree, the restrictions apply to “supply contracts that directly or indirectly use the mechanism of setting a price cap” and are “in force at all stages up until the final buyer”
> Russia’s flagship crude is already trading below the $60/Bbl cap set by the G7 nations, meaning most trade can continue regardless of the restriction
> Still, according to Deputy Prime Minister Alexander Novak, Russia's oil production could decline by 0.5 – 0.7 MMBbl/d in early 2023, or 5%–6% of the country's current output

Natural Gas

Natural gas prices are down nearly 50c, or 9.5%, to $4.78 in the prompt month
> The Summer ’23 strip is down 17c to $4.17, and the Winter ‘23/’24 strip is lower by 13c to $4.82
> Weather forecasts for the next two weeks indicate temperatures will rise above the 10-year normal and remain warmer than average into the second week of January

Natural gas production fell significantly due to freeze-offs
> Production from the Appalachian Basin fell the most, down by 27%, or 9 Bcf/d, which is the largest production decline from that region since 2013
> As of Tuesday, pipeline nominations showed total US dry gas production at 89 Bcf/d, about 10 Bcf/d lower than last week’s average production level
> Preliminary pipeline nominations today show US production at 92 Bcf/d as freezing conditions subside and production returns to normal

Kinder Morgan believes volatility will continue to impact the gas market in 2023 (S&P)
> Kinder Morgan’s CEO, Steve Kean, said that “We used to see a phenomenon in the summertime when it was really hot there was a little bit of a cap on gas prices …at $4/MMBtu or right in that ballpark you'd start to see the coal plants turn on, that’s not happening, and that's a significant thing”
> Kean said that the retirements of coal power plants have tightened the power market and partially explain the volatility seen over the past year
MY TAKE: It is important to understand that high coal prices and fewer power plants that can switch from natural gas to coal has set a higher base price for natural gas. The full impact of Winter Storm Eliot will take more time to figure out. In Appalachia there is probably some damage that will take weeks to fix.

Don't get too worked up by the moves in oil & gas prices during the week between Christmas and New Year's. Lots of the paper traders probably set tight stop loss orders before they went on vacation.
> The "noise" coming from China about Covid seem to be never ending. IMO, without billions of shots that really aren't vaccines anyway all China can do is let the virus run its course and move them to herd immunity anyway.
> Winter Storm Elliot's impact on supply should be bullish for oil prices.
> Russia's ban on oil exports to any country adopting the G7's price cap is also bullish as it takes more oil supply off a market that is already extremely tight.
> U.S. oil production is down and likely to stay below 12 million bpd through Q1.
> OPEC+ is in control of this world's oil price and they want higher prices.
> Natural gas traders will continue to react to each change in the weather forecast. La Nina Winters cause big swings in the jet stream. There will be several more big dips in the jet stream and more cold waves before this winter is over. Winter doesn't end in December.
> As I mentioned in my 12/24 podcast (slide 8), I think 2023 will be another wild ride for natural gas prices with a price pattern close to what we had in 2022.
> The War in Ukraine is unlikely to end soon, so Europe and Asia will be in another bidding war for LNG cargos next summer.

Trading Economics:

WTI crude futures fell to below the $78 per barrel level on Wednesday, retreating from the three-week high of $81 in the previous session as investors started to worry about demand in China. After the Chinese government suddenly dropped stringent “zero-COVID” restrictions, the infections started to surge disrupting further economic activity. In the meantime, oil refineries on the Texas Gulf Coast are trying to resume operations after freezing temperatures forced a halt last week, drawing back concerns about low supply. On the other hand, Moscow moved to ban exports of Russian crude oil and refined products to foreign buyers that adopt the G7 price cap starting February 1st until at least July 2023. However, the Russian response to the price cap did not include a minimum price for its crude which was feared by markets. On a year, WTI crude futures are set to close 2022 only marginally higher, despite reaching a 14-year high of $120 per barrel in March.

US natural gas futures were trading below the $5.0/MMBtu mark, hovering close to levels not seen since late March, amid prospects of lower heating demand on forecasts for much warmer-than-normal temperatures this week and extending into early January. Still, this downside momentum should be capped by supply disruptions after wells and pipes froze due to extreme cold. At the same time, the Freeport LNG export plant in Texas, forced to go offline in June following a fire, was poised to receive natural gas this week, a possible indication that the plant will meet the company's projected end-of-year return date. The benchmark is still up more than 30% in 2022 as Russia's invasion of Ukraine and the unprecedented economic sanctions have thrown the global energy market into chaos. Still, prices were down more than 50% from their March peak of roughly $10 as some of these concerns about tight supplies eased.

Closing Prices:
> Prompt-Month WTI (Feb 23) was down $-0.57 on the day, to settle at $78.96
> Prompt-Month Henry Hub (Jan 23) was down $-0.573 on the day, to settle at $4.709 < In Q1 2022 the price of HH ngas averaged $4.48 and we all thought it was great. It is all relative.