Energy Prospectus

Trading Economics:
WTI crude oil futures rose over $69 per barrel on Monday morning, extending Friday’s gain of more than 2% as traders braced for additional US sanctions on Russia that could tighten global oil supplies.
> US President Trump last week announced plans to make a “major statement” on Russia on Monday, without providing further details. On Sunday, Trump said he will send Patriot air defense systems to Ukraine, as he expressed frustration over Russian President Putin’s refusal to negotiate an end to Moscow’s invasion.
> Reports also indicated that European Union envoys are close to agreeing on an 18th package of sanctions against Russia that would include a lower price cap on Russian oil.
> However, price gains were tempered by concerns that US tariffs could weigh on economic growth and curb oil demand. < FEAR Mongering about the tariffs, which fuels the FEAR of a Global Recession are the only reason why WTI is below $70/bbl. U.S. and OECD petroleum inventories are below normal for this time of year (U.S. diesel inventories are WAY BELOW normal) and there is no indication that demand for oil-based transportation fuels and other products will decline.
> Trump announced 30% tariffs on goods from the EU and Mexico, adding to a growing list of countries facing updated duties starting August 1, since he began posting tariff letters last week.

US natural gas futures rose over $3.40/MMBtu Monday morning, rebounding from a 6-week low on July 9, driven by rising LNG export flows and forecasts for hotter-than-average weather, which is expected to increase demand through late July.
> Gas flows to the eight major US LNG export plants averaged 15.6 billion cubic feet per day (bcfd) in July so far, as several facilities resumed operations following maintenance and outages.
> On Thursday, LNG feedgas was on track to hit a 10-week high of 16.0 bcfd, with flows to Cheniere Energy’s Corpus Christi plant rising from 1.5 bcfd to 2.2 bcfd.
> Warmer weather forecasts across the Lower 48 states suggest higher cooling demand will persist.
> Meanwhile, a federal report showed a 53 bcf injection into storage for the week ending July 4, matching the five-year average. < Mild weather for this time of year in Texas and the Southeast U.S. during June and early July are why weather-related natural gas demand for power generation has been less than expected. Weather is expected to move back to normal (HOT and humid) in 2H July and August. Below are Celsius Energy's forecasts for U.S. NGas storage builds the next four weeks.
Weeks ending
July 11 > 49 Bcf
July 18 > 40 Bcf
July 25 > 28 Bcf
Aug 1 > 28 Bcf

Oil price uncertainty is amplified by political "noise".

WTI crude oil futures fell 1.5% to below $67.50 per barrel on Monday after President Trump stopped short of announcing new sanctions on Russian oil, disappointing markets that had anticipated tougher action.
> While Trump did warn of potential 100% secondary tariffs on Russia if a ceasefire isn’t reached within 50 days, the absence of immediate measures weighed on prices.
> Meanwhile, Trump’s escalating global tariff threats, including 30% duties on EU and Mexican goods, dampened risk appetite and fueled concerns over weaker energy demand. Traders fear that protectionist policies could hurt global growth and contribute to an oil supply glut later this year. < U.S. and OECD inventories are below normal for this time of year. There is no sign of a "GLUT" of oil now or coming anytime soon. Using the word glut is a way to "talk down" the oil price. Team Trump's biggest fear is inflation.
> Hedge funds have responded by cutting bullish positions at the fastest pace since February. Still, Chinese trade data offered some support, with crude imports rising and Iranian oil purchases climbing in June, signaling resilient near-term demand.

"Based on current rig counts, our models suggest that Permian production could fall by as much as 400,000 barrels per day by year-end. That’s not a small dip, but rather a meaningful shift in the global supply picture." - Adam Rozencwajg

What does this mean for oil prices?

At the end of April, a single ounce of gold could buy 56 barrels of crude, the second-highest reading on record. For context, over the past 35 years, the gold-to-oil ratio has averaged 17 barrels per ounce and has remained below 25 nearly 85% of the time. Even during the market chaos of March 2020, when COVID lockdowns brought demand to a standstill, the ratio only just crossed 40 barrels. It would briefly surge to 90 the following month, but that spike, like the moment itself, was fleeting.

The implications are more than academic. Since 1990, the median forward 12-month return for spot WTI crude has been about 4%. But when oil has traded at these kinds of relative discounts—when an ounce of gold buys more than 25 barrels—that median return has jumped to 30%. Conversely, when the ratio has dipped below 20, WTI’s forward performance has tended to be negative. In other words, when oil is this cheap, history suggests it rarely stays that way for long.

Historically, such steep discounts in oil—whether measured in real dollars or relative to gold—have coincided with obvious imbalances: too much crude sloshing around, and nowhere to put it. Sharp moves higher in the gold-oil ratio have tended to coincide with rising OECD petroleum inventories, the industry’s clearest signal of oversupply. Sell-offs, too, have typically occurred when inventories were not just rising but already flush, providing a comfortable cushion should demand return.

None of that applies today.

Since bottoming in June 2022, the gold-oil ratio has climbed from 15 to 58—nearly a fourfold increase. And yet, rather than swelling, inventories have steadily declined. Petroleum stocks across OECD countries are now at their lowest levels in more than two decades. If this market is in surplus, it is hiding it unusually well. More likely, the deficit persists, quietly but persistently, even as prices and sentiment suggest otherwise.

Unlike in previous sell-offs, today’s oil price appears to have skipped past uncertainty and gone straight to conviction—pricing in, with unnerving resolve, the worst-case scenario. For market fundamentals to truly justify current levels, conditions would have to deteriorate swiftly and severely from here. Should that come to pass, it would be among the rare instances when the consensus—so often late, so frequently wrong—is proved entirely correct.

We would not count on it.

More likely, the recent retreat in oil prices reflects not foresight, but fatigue—a market grown weary, not wise. And if history is any guide, such periods of deep pessimism have often preceded handsome returns for those with the temerity to doubt received wisdom.

What makes this moment especially striking is that, just as sentiment has reached its lowest ebb in years, the most consequential bullish development (pointing to higher oil prices) in over a decade has quietly taken root: U.S. shale oil production, after years of relentless ascent, appears at last to have turned. < EIA has now reported two weeks in a row of declining U.S. oil production. As I have posted here many times, U.S. upstream companies are not completing enough new wells to hold production flat. Unless the active drilling rig count starts going up (unlikely) the rate of U.S. oil production decline will accelerate.