Energy Prospectus

Have you noticed that oil & gas prices pull back on the first trading day of the week? I think it is caused by the paper traders tightening up their stop loss prices on Friday and a few sell orders at the open start the selloff. In my opinion, the fundamentals point to a tightening of the global oil market. Note below that China is buying more oil and taking steps to stimulate their economy. Also note below that we are finally seeing signs of Russia oil exports falling.
-------------------------------
Opening Prices:
> WTI is down $0.83 to $70.95/bbl, and Brent is down $0.77 to $75.84/bbl.
> Natural gas is up 2.0c to $2.652/MMBtu.

AEGIS Notes
Oil

Oil trades slightly lower amid concerns of weaker-than-expected Chinese economic rebound
July ’23 WTI lost 83c this morning to trade around $71/Bbl

On Tuesday, China cut two key lending rates by ten basis points each, marking the first-rate cuts in ten months
China lowered short-term interest rates following weak inflation data last week, with an extensive stimulus package also being considered

Following its largest drop since January, the U.S. dollar continues to trade lower, supporting crude prices, with equities also trading lower post-Juneteenth holiday

China's June Imports of Russian Oil to Hit Record High (Bloomberg)
China is set to import a record 1.5 MMBbl/d of seaborne Russian crude in June, a 6% increase from May, according to Kpler
State and private Chinese firms, seeking profit from discounted crude, now lead in buying Russian oil, switching from their cautious stance due to EU sanctions
China additionally imports about 0.8 MMBbl/d via the ESPO pipeline and Kazakhstan transit routes
However, total Russian seaborne crude exports saw a minor decline from 3.66 MMBbl/d to 3.63 MMBbl/d in the four weeks to June 18
Current flows are down 0.21 MMBbl/d from their May 21 peak but still 0.25 MMBbl/d more than early 2023. Approximately 90% of these flows head to Asia

Iran's Crude Exports Hit Five-Year High (Bloomberg)
Despite being constrained since 2018 due to U.S. sanctions, Iran's oil exports exceeded 1.5 MMBbl/d in May, the highest since 2018, with China being the primary buyer
Additionally, Iran has increased its crude production to over 3 MMBbl/d, constituting about 3% of the global supply - the highest since 2018

Natural Gas

Natural gas prices continue to trade at a multi-month high, around $2.65
Weather forecasts cooled significantly, with the biggest changes in the Northeast and Midwest regions, although the South Central region’s forecast warmed by 13 °F
Lower 48 temperatures are expected to be relatively close to the ten-year normal over the next two weeks, while South Central temperatures are forecast to remain above normal over the same time period

LNG feedgas flows remain lower, around 11-Bcf/d, amid maintenance at the Sabine Pass export facility

Texas: ERCOT power prices surge as heatwave impacts grid (Reuters)
Day-ahead power prices for Tuesday settled at $2,500/Mwh in several ERCOT zones, including Houston and Dallas, on expectations of record electricity demand
ERCOT has said that it will have enough resources to meet demand, which is expected to peak at about 82-GW
Natural gas demand from the power sector in Texas has climbed from 6.2-Bcf/d last Tuesday to 7.6-Bcf/d today

FERC approves Ohio Valley Connector Expansion project (S&P)
The OVCX will add additional firm transport capacity to move gas from Equitrans Mainline and Sunrise transportation systems to interstate pipelines in the Appalachian region
The line will connect to Texas Eastern Transmission and Rockies Express near the border of Ohio and West Virginia
Developers plan to have the project online in the first half of 2024, adding 330-MMcf/d of additional egress capacity

A note from our friend Keith Kohl over at the Energy Investor:
-----------------------------------------------
Everyone on Wall Street has been underestimating the comeback of China’s economy.

Under current growth estimates, China’s GDP is projected to increase up to 6% in 2023.

But let’s be clear about one thing…

China’s recovery will never last without one thing: energy.

Last month, officials in Beijing announced that China imported approximately 9.71 million tonnes of oil from Russia — more than double the amount that it did in February 2022 when Russia invaded Ukraine.

However, this is more just than a rebounding economy. It turns out that China is also stockpiling a massive amount of crude at lower prices.

U.S. Drilling Activity Slump Will Cause Bigger Problems Later This Year

Keep your eyes on this story as we head into the latter half of 2023.

Last Friday, Baker Hughes reported that the number of drilling rigs actively looking for oil and natural gas in the United States declined by eight, bringing the total rig count down to 687.

While less drilling is most certainly bullish for prices, this is a trend we’ve been seeing for over a year.

In fact, there are now 53 fewer rigs drilling beneath U.S. soil than there were at this point last year.

Why is this one of the most overlooked stories in the U.S. energy sector right now? Well, not only does it signal that output will decline going forward, but we have to always keep in mind that today’s oil supply isn’t the same as it was decades ago.

The tight oil that has flooded U.S. supplies over the last 15 years is notorious for steep decline rates, which means you have to drill more to keep output steady.

Right now, the clock is ticking for U.S. oil production. < I agree with Keith. EIA and IEA are over-estimating U.S. oil production growth. At the current active drilling rig count, I see very little chance of U.S. oil production coming anywhere close to the pre-pandemic peak of ~13 million bpd. IEA keeps raising their oil demand forecast for 2023 (because they ALWAYS start the year by under-estimating demand) and they keep expecting non-OPEC+ production growth to be lead by the U.S.

Good investing,

Keith Kohl

Energy Investor