Energy Prospectus

Opening Prices:
> WTI is down $0.13 to $69.43/bbl, and Brent is down $0.12 to $73.91/bbl.
> Natural gas is down -4.1c to $2.627/MMBtu.

AEGIS Notes
Oil

Oil trades lower amid ongoing concerns over potential interest rate hikes
> August ’23 WTI lost 13c this morning to trade around $69.43/Bbl
> Expectations of future interest rate hikes continue to weigh on crude prices in addition to moderate Chinese demand recovery
> Furthermore, the strength of the U.S. dollar has made commodities priced in USD expensive for holders of other currencies

World central bank chiefs on Wednesday agreed that more policy tightening is needed to curb high inflation, confident it won't lead to recessions (Reuters)
> Fed Chair Powell and ECB President Christine Lagarde signaled continuous rate hikes in the US and Europe
> Also, Bank of England's Andrew Bailey vowed to tackle the UK's persistent inflation, and Japan's Kazuo Ueda hinted at possibly ending their ultra-easy policy
As I posted here yesterday, higher interest rates do impact crude oil storage levels by making the carrying of high levels of oil inventories more expensive. This puts pressure on the front end of the NYMEX strip because fewer investors want to take physical delivery.

Unyielding Saudi Oil Tanker Queue at Egypt's Ain Sukhna Terminal (Bloomberg)
> Since mid-June, a backlog of seven Saudi and two Chinese supertankers carrying Saudi oil persists at Egypt's Ain Sukhna terminal
> Despite the departure of three tankers, new ones have joined the queue, suggesting an ongoing problem likely due to storage shortage, exacerbated by recent maintenance in European and North American refineries
> Additionally, Saudi crude exports dipped from 7.5 MMBbl/d in April to 6.6 MMBbl/d in May, continuing the trend this month, according to Kpler < This is one of the keys to higher oil prices. Supply/Demand fundamentals point to the global oil market being under-supply during Q3 by 1.5 to 2.5 million bpd.

Natural Gas

Natural gas prices are trading lower, around $2.62, with the August contract now the prompt month
> The Winter ‘23/’24 strip is at $3.46, and the Summer ’24 strip is trading $3.24 < The strip is above what I have been using in my forecasts ($2.50 for Q3 and $2.75 for Q4)

The EIA will release its weekly natural gas storage report today
> The median estimate, according to the Bloomberg survey, is for a build of 82-Bcf, while the survey ranges from a low of 76-Bcf to a high of 89-Bcf
> Weather forecasts shifted cooler for the Midwest and South Central regions, with the Midwest forecast losing 13.6 °F over the two-week period and the South Central forecast losing 5.9 °F < I laugh when I hear our weather forecasters in Texas calling the high 90s "cooler".

Texas: ERCOT hits new record load, but renewables are limiting gas demand (BBG)
> Power demand in the ERCOT system reached 80.15-GW on Wednesday, with today’s forecast indicating another record high of 82.09-GW
> Despite the higher load, the net load, or the remaining demand after subtracting wind and solar, has fallen relative to last week
> Power prices have also been subdued, with prices expected to average around $70/Mwh at the time of peak demand today, compared to last week’s spike to $4,840/Mwh
> Texas power sector gas demand is currently about 7.05-Bcf/d, a reduced level from last week’s peak of 7.63-Bcf/d and weekly average of 7.21-Bcf/d, even with the higher demand for electricity

The backlog of tankers at the Egypt terminal (better call Mayor Pete!) seem to indicate lack of demand due to "shortage" of available storage. I had heard recently that China has filled their available storage of petroleum to historic levels possibly to the brim. That coupled with reports that their economy is in the tank (no pun intended) does not bode well for oil demand. I believe that Saudi probably has the best information and brightest folks analyzing the oil markets. I am having a hard time believing there is a 2 million + bbl day shortage of supply when Saudi is making voluntary cuts of 1 million bbl a day starting this weekend. Why would they be cutting going into high demand forecast period. The only logical explanation I can conclude is there fields may not be performing as well as most believe.

Oil steadies after spiking on U.S. inventory fall. Reuters.
Oil prices steadied on Thursday, a day after rising sharply on a bigger-than-expected fall in U.S. inventories, as attention shifted back to rising interest rates denting global economic growth. Brent crude futures was up 10 cents, or 0.1%, to $74.13 a barrel by 1032 GMT. U.S. West Texas Intermediate (WTI) crude futures rose 11 cents, or 0.2%, to $69.67 a barrel. Both benchmarks gained about 3% on Wednesday after the U.S. Energy Information Administration (EIA) said crude inventories dropped by 9.6 million barrels in the week ended June 23, far exceeding the 1.8-million barrel draw analysts had forecast in a Reuters poll.

At the time of this post WTI is up $0.61 to $70.17.

Looks like the Q3 average price for WTI will be within the $72 to $73 range, compared to $75/bbl that I have used in my forecast models. Higher natural gas prices than the $2.25 I used for HH ngas in Q2 and improved differentials should offset the lower than expected oil prices.

Saudi Arabia is cutting production in July by a million bpd to push Brent oil prices higher. Plus, I do think some of their oilfields need a "rest". Saudi Arabia will support oil prices because their economy lives on oil revenues.

Per IEA's June report: "Global observed oil inventories rose by 10 mb in April as a 15.9 mb decline in oil on water and a 1.1 mb drop in non-OECD stocks partly offset a 27 mb build in OECD stocks. OECD industry stocks rose by 33.6 mb but were still 86.4 mb lower than the five-year average. Preliminary May data show a further stock build in OECD countries of 21.1 mb." There is plenty of available storage capacity.

Note that IEA is talking about "OECD Industry Stocks". The OECD countries have drained their Strategic Petroleum Reserve.

Just in the U.S., total Petroleum Inventories (including the SPR) have declined from 2,117.6 million barrels on July 3, 2020 to 1,612.5 million barrels on June 23, 2023. That is a decline of 505.1 million barrels of 23.85%. BTW the U.S. still took some oil from the SPR in June. That should stop in July.

Trading Economics at 2:15PM CT:

"WTI crude futures rebounded above $70 per barrel on Thursday, as investors assessed a larger-than-anticipated decrease in US inventories and weighed the impact of rising interest rates on global growth and fuel demand. The latest report from the Energy Information Administration (EIA) revealed a significant drop of 9.6 million barrels in crude inventories last week, surpassing market expectations of a 1.8 million barrel draw. In addition, a positive revision to the US first-quarter GDP growth further strengthened expectations of the Federal Reserve's continued increase in interest rates to control inflation. On Wednesday, leaders of the world's major central banks reiterated their belief that further policy tightening would be necessary in the coming months. Elsewhere, Saudi Arabia has also pledged to significantly reduce its output in July, which complements the broader OPEC+ agreement to limit supply until 2024." < Team Biden continued to drain the SPR in June. That should stop in July, which should cause U.S. commercial crude oil inventories to decline faster.

"US natural gas front month futures contract (JUL23) has been fluctuating within a $0.50 range during the month, settling around $2.7/MMBtu at the end of June. Prices have risen by nearly 15% for the month, extending the second-quarter gain to almost 22% and are expected to continue to increase throughout the summer due to a slight decline in production and an anticipated rise in demand for air conditioning, leading to higher usage of natural gas in the electric power sector, according to the EIA. However, natural gas prices still remain approximately three times lower than the levels observed in June of the previous year, amid increased supply in the US, including the resumption of operations at the Freeport LNG export facility, a mild winter experienced in the northern hemisphere during 2022-23, and strong stockpiles in Europe." < Q4 NYMEX futures now sit at $3.15 and Q1 2024 futures average $3.63.

Closing Prices:
> Prompt-Month WTI (Aug 23) was up $0.30 on the day, to settle at $69.86
> Prompt-Month Henry Hub (Aug 23) was up $0.033 on the day, to settle at $2.701