Energy Prospectus

Opening Prices:
> WTI is up $0.52 to $80.85/bbl, and Brent is up $0.51 to $86.67/bbl.
> Natural gas is down -7.0c to $3.205/MMBtu.

AEGIS Notes
Oil

Oil set to post a second consecutive-weekly gain on optimism over China’s demand
Feb ’23 WTI gains nearly 50c this morning to trade around $81/Bbl
Rising optimism about the return of Chinese demand has been the main bullish factor for oil markets as China prepares for its New Year festivities
China’s biggest oil trader Unipec bought cargoes equivalent to 9 MMBbl this month; signaling consumption has picked up
Additionally, hopes that the Fed will ease its interest rate hikes have supported crude prices
The market shrugged off this week's large 8.4-MMBbl rise in U.S. crude inventories

JP Morgan says oil will struggle to surpass $100/Bbl this year (BBG) < Goldman Sachs, Morgan Stanley and Raymond James are all forecasting WTI over $100/bbl in Q4 this year.
The bank raised estimates for Chinese oil demand growth in 2023 by 0.230 MMBbl/d to 0.770 MMBbl/d but said crude prices would remain below $100/Bbl
Despite estimates that Chinese demand is on track to reach a record high of 16 MMBbl/d, the bank forecasts that global supply will rise 50% faster than demand this year
JPM maintains their forecast for Brent to average $90/Bbl in 2023
“Absent any major geopolitical events, it’d be difficult for oil prices to breach $100/Bbl in 2023,” said the bank in a note on Thursday
Additionally, the note said that OPEC+ would need to cut a further 0.400 MMBbl/d for the $90 Brent forecast to be realized

China’s imports of Russian crude fell to the lowest since March (BBG)
China's crude imports from Russia fell by 1.34 million tons last month to 6.47 million tons, the lowest level since March 2022, according to the General Administration of Customs
Despite the report's findings that Russian crude imports have decreased, Moscow continues to be China's second-largest crude supplier after Saudi Arabia (7.12 million tons); in contrast, US shipments to China have decreased by 31% year over year
An escalation of western sanctions may have deterred some purchases from state refiners

Natural Gas

Natural gas prices are up slightly, trading around $3.31
Yesterday the EIA released its weekly natural gas storage update, reporting a withdrawal of 82 Bcf
This withdrawal was much smaller than the five-year average withdrawal of 187 Bcf
Kinder Morgan to finish the repair of El Paso Natural Gas line 2000 in January (S&P)
Line 2000 has been offline since an explosion in August 2021 near Coolidge, Arizona
In December 2022, El Paso Natural Gas received approval from federal regulators to restart the impacted pipeline segment, but with a mandated pressure restriction

Kinder Morgan said they believe the remaining repair work will be completed by the end of January 2023; then it must be reviewed by regulators
Once the pipeline returns to full operation, it should increase the amount of supply available to be transported into the California market from the Permian Basin < This should help raise Delaware Basin gas prices.

Germany’s third floating LNG import terminal arrives (Reuters)
A new terminal has arrived in the port of Brunsbuettel, which will enable more LNG cargoes to be imported into the EU
The first cargo is set to arrive at the end of January from Abu Dhabi National Oil
The addition of this terminal brings Germany’s total LNG import capacity to 494 Bcf
Three more floating LNG terminals are scheduled to be in place for the ‘23/’24 winter season, which should help Europe to rebuild gas inventories without Russian pipeline gas

Aramco chief warns of possible oil supply shortages with Chinese Demand set to surge & Accelerating Rates of Decline
CNBC JAN 18 2023

The head of Saudi Aramco, Amin Nasser warned that despite the relative balance in the oil markets currently, we are facing a substantial supply shortfall in the long term if global upstream investment does not start to surpass accelerating rates of natural decline.

The chief of the world’s largest oil company is worried about global crude supplies. Current market dynamics — such as China’s slowdown and an aviation sector that is still recovering from the Covid-19 pandemic — have kept demand relatively subdued, but that is set to change soon. Saudi Aramco CEO Amin Nasser fears the world won’t have enough spare capacity to deal with that shift.

“For crude oil, we are in a situation where there is a spare capacity that is helping to mitigate interruptions,” Nasser told CNBC’s Hadley Gamble. “However, I am not so sure about the mid-to-long term, because as the spare capacity erodes, we will not be having the capability to mitigate any short or long term interruptions like what happened with Russia-Ukraine crisis.”

Aramco pumps about 10% of the world’s crude oil supply. It has a maximum capacity to pump 12 million barrels of crude per day, Nasser said, and is working on increasing that by a further million barrels per day. Still, he says, “We should be worried about the mid to long term. I think there will be an issue in meeting the growing demand.”

The latest oil market report from the International Energy Agency out Wednesday forecast global oil demand will increase by 1.9 million barrels per day in 2023 to reach a record 101.7 million barrels per day — with nearly half of that coming from China. The agency meanwhile expects oil supply growth to slow to 1 million barrels per day in that same period.

While Aramco is working on building additional production capacity, “I don’t think it is enough investment to bring additional capacity that will be needed to supply the market,” Nasser said. “It will not mitigate a situation where the demand is growing and offsetting the decline. You need additional investment elsewhere, globally, to meet global demand.”

Investment in hydrocarbons has decreased amid a focus on decarbonization, and government regulations in many countries discourage fossil fuel exploration and drilling. Saudi Arabia and many of its partners in the OPEC producers’ alliance have repeatedly called for simultaneous investment in hydrocarbons and in the energy transition to avoid a future supply squeeze.

The looming supply-demand dynamic could bolster prices. Maarten Wetselaar, chief executive of Spanish oil company Cepsa, on Wednesday predicted that the crude oil price would return to triple-digits in the second half of 2023. Front-month Ice Brent crude futures were trading near $87.36 per barrel at midday in London.

“Think about it this way,” Nasser said. “Today we have around 2 million barrels of spare capacity. The aviation industry is 1 million barrels below pre-Covid level. As [the] aviation industry picks up in 2023-24, that’s an additional 1 million barrels. [Consider] China opening up and that will really add a lot to the demand side.”

He stressed, “So all of these indicators now, without looming recessions — if economies start picking up and improving, that will also require additional supply. So you need additional investment to prepare for what’s coming.”

Closing Prices:
> Prompt-Month WTI (Feb 23) was up $0.98 on the day, to settle at $81.31
> Prompt-Month Henry Hub (Feb 23) was down $-0.101 on the day, to settle at $3.174 < The weather forecast for Chicago shows that Old Man Winter is heading back to the Windy City for a visit next week. I hope he decides to spend the entire month of February there.