Energy Prospectus

Lots of noise impacting oil and gas prices, with the Paper Traders dealing with a lot of conflicting data.

Trading Economics
Oil
WTI crude oil futures fell to around $67.5 per barrel on Thursday, after hitting an over two-month high in the previous session on fears of supply disruptions amid rising tensions between the US and Iran.
> The US is preparing a partial evacuation of some personnel in the Middle East after Iran threatened to strike US bases in the region if nuclear negotiations fail. < Did ANYONE actually believe that Iran's Supreme Leader would agree to totally stop the enrichment of uranium?
> Prices were also supported after the US and China on Tuesday agreed to a framework and implementation plan to ease trade tensions, boosting optimism for energy demand from the world’s two largest oil consumers. < The deal terms (55% tariffs on imports from China) sound good, but will the Chinese actually abide by the terms.
> Data released by US EIA showed crude oil stocks fell by 3.6 million barrels in the week ended June 6, more than forecasts of a 2 million-barrel decline, signaling strong demand. < Draws are normal in June & July because demand for transportation fuels remain high, like they ALWAYS do this time of year.
> Moreover, softer-than-expected US consumer inflation data reinforced expectations that the Federal Reserve could begin cutting rates by September, which could spur economic growth and oil demand. < Sounds like the right thing to do, but Powell always seems to wait too long to do the "right thing".
All of the points above sound bullish for oil prices, but it is the sheer amount of the "noise" that keeps oil below $70. I'm using $62.50/bbl in all of my Q2 forecast and $65.00 in my Q3 forecasts.

Natural Gas
US natural gas futures rose to $2.60/MMBtu on Thursday, supported by lower production and signs of rising LNG demand as facilities exit maintenance.
> Cameron LNG in Louisiana is set to boost intake, with gas flows rising to a four-week high of 1.5 bcfd, up from a 1.4 bcfd monthly average.
> Meanwhile, average gas output in the Lower 48 states eased to 105.0 bcfd so far in June, slightly below May’s 105.2 bcfd and well below March’s record of 106.3 bcfd, due to routine spring maintenance.
> Warmer-than-normal weather is expected across much of the US through June 26, which may drive up cooling demand.
> Still, analysts forecast another triple-digit storage build for the week ended June 6, marking what could be a record-tying seventh such injection.
Demand for U.S. natural gas will go a lot higher in July and injections to storage will go much lower. I am using $3.25 in my Q2 forecasts and $4.00 in my Q3 forecasts

EBW Analytic Group:

Natural Gas Demand Surge Begins to Take Shape

The July natural gas contract declined for a third straight day yesterday to its lowest close
this month at $3.507. Henry Hub spot prices continue to wither at $2.74/MMBtu—
extending the physical market role as a bearish weight on near-term prices.

Still, the constructive demand picture continues to roll forward. Cameron LNG has finally
returned to drive national feedgas to 14.6 Bcf/d—clarifying the path towards 16 Bcf/d in
late June when two trains at Sabine Pass return and Corpus Christi adds another
midscale unit. Weather forecasts continue to grind in a warmer direction.

This morning's EIA report, with consensus estimates for a 106-109 Bcf injection, could
offer immediate-term direction for a flagging market. To the downside, key technical
support lies at $3.43. Following last week's bearish holiday-week surprise, however, a
bullish "correction" today could add fuel to the kindling of building demand into summer.

Significant Developments

Talen Energy and Amazon have inked a 1,920 MW Power Purchase Agreement for output from its Susquehanna nuclear plant, shifting
away from a contentious “behind the meter” co-location agreement to a conventional PPA that Talen alleges will not require FERC
approval. The prior co-location agreement (with Amazon siting data center facilities on the Susquehanna campus “behind the meter”) led to
successful challenges suggesting that Amazon would be avoiding hundreds of millions of dollars in grid costs while benefitting from ties to
the grid. The conventional PPA still underscores a rapidly tightening PJM market as data centers sign PPAs for existing generation
capacity. After flat peak load for the prior decade, PJM is anticipating a 3.7% year-over-year peak load increase this year and a 3.1%
increase in 2026, with its market monitor calculating data centers responsible for $9.3 billion of $12.5 billion increase in capacity costs in
PJM’s head-turning 2025-26 capacity auction.

The EIA’s Preliminary Monthly Electric Generator Inventory highlights that only 18.7 GW of new combined cycle gas capacity is expected
by 2028. 4 GW is under construction; more than half of projected capacity has not even secured required permits. Even if all projected
combined cycle capacity comes online on time and operates at a 75% capacity factor, it may add just 2.5 Bcf/d of demand from new
capacity in the next three years. Further, massive backlogs in procuring natural gas turbines act as a limiting factor on additional growth.
While the existing gas fleet can run at a higher capacity factor—and tightening electricity markets may elevate marginal heat rates—a lack
of new gas capacity and booming renewables may dampen power burn gains over the next 2-3 years.

Notes from 22V Research this morning

+ Crude prices surged on Middle East tensions yesterday afternoon. They were also responding to three constructive market factors: (1) news of the U.S.-China trade truce, (2) the benign U.S. CPI report, and (3) strong EIA stats for U.S. oil demand.

+ But prompt WTI price encountered stiff resistance overnight at $68 for the cost-based reasons we have discussed repeatedly. Unless there is an actual disruption to Iranian or other Middle East crude oil supplies, WTI will most likely fade back into its $60-$68 range—with $63 the most likely price at yearend—and any upside out of that range will most likely need to be led by refined oil products.

+ Refined oil prices are cheap and unconstrained to make strong advances, which are two reasons why shares of Marathon Petroleum Corp. (MPC) made a fresh 2025 high yesterday. MPC’s +18.0% YTD price return is beating 88% of the S&P 500, in one validation of our Abandoned Alpha strategy to own U.S. refiners, natural gas producers, and the midstream.

+ To meet even conservative projections for U.S. power demand over the next 36 months, we calculate the 12-month NYM natural gas strip ($4.07 per MMBtu, Jun 11) needs to advance beyond $4.50, with a 50% probability that cash Henry Hub ($2.73, Jun 11) exceeds $5.05 per MMBtu at yearend 2025. < If this happens (and I believe it will), 2026 is going to be a VERY PROFITABLE YEAR for all of the upstream companies that produce a lot of natural gas and NGLs. Eleven of the Sweet 16 companies have a production mix of more that 50% Ngas + NGLs as measured on a Boepd basis and for most of them, the gas-to-oil ratio is increasing each quarter. Just keep in mind that natural gas prices in the Permian Basin will go up, but stay well below the HH Ngas price due to pipeline capacity issues. Crescent Energy (CRGY) is primarily a South Texas Eagle Ford company with a production mix of 60.1% Ngas and NGLs. South Texas has plenty of pipeline capacity and direct access to big LNG export facilities on the Texas Gulf Coast.

+ In the event of an actual disruption to Middle East oil supplies on military action or international sanctions, Saudi Arabia alone possesses sufficient spare crude oil capacity to offset all foregone Iranian exports (1.7 million b/d), given that OPEC+ is producing materially below its headline quotas. However, broader oil supply losses would quickly exhaust the easier offsets. Diminishing global spare capacity would in turn increase in its relative weight as a factor component in oil price formation. < On page 7 of the EIA's STEO full report at this link there is a chart that shows the OPEC+ is very close to their actual maximum supply: https://www.eia.gov/outlooks/steo/pdf/steo_full.pdf

+ As markets weigh the probability of a potential oil supply shock, resistance at $68 may diminish but will not dissolve unless a material hole in global supplies calls higher-cost U.S. oil capex back into service. < In other words, there is not going to be any "Drill Baby Drill" in the U.S. until WTI is firmly over $70/bbl

+ Investors should not overlook the possibility that these risks stimulate incentives for the American president to refill the U.S. Strategic Petroleum Reserve with American crude oil supplies (perhaps 150 thousand b/d for three years?) procured to clear marginal investment hurdle rates ($70 per bbl). To put that potential incremental demand in frame, we estimate total world liquids demand growth this year will be 950 thousand b/d.