Market Summary - Week Ending February 11

WTI prices surged nearly $4/Bbl on Friday as political tensions between Ukraine and Russia intensified. The late rally rescued the week; West Texas Intermediate settled Friday at $93.10, a 73c move higher on the week and an eighth straight week of gains. National Security Advisor Jake Sullivan said Friday that the U.S. thinks Russia could launch an offensive or attempt to ignite a conflict inside Ukraine as early as next week. Russia has denied plans to invade, but a Russian invasion could disrupt crude supplies in an already-tight oil market.

During the week, traders were likely nervous about the possibility of Iranian crude oil coming back into the market. Nuclear talks between the U.S. and Iran are progressing, increasing the likelihood that up to 1.5 MMBbl/d of oil could reenter the market over the next year. The return of Iranian crude has long been a top bearish risk in our Factor Matrix.

Despite worries of additional supply from Iran, the oil forward curve remains in steep backwardation. A downward-sloping forward curve, with comparatively higher prices in the front of the curve, is a signal of an undersupplied market. This week, the International Energy Agency warned that global oil prices could climb higher because of OPEC+’s “chronic” struggle to revive production. According to Bloomberg, OPEC+ produced about 900 MBbl/d less than their collective target in January.

Put options need to be in your hedging discussion as a producer. On Friday, a blended four-month put option “floor” at $75 cost around $3 per barrel. Guess what the forward curve value for those WTI tenors was a month ago? Around $75. If the extra premium is too distasteful, or if you think this market is due for a trend reversal downward, then look at swaps. We especially like swaps for the first half of 2022, but not after. Most producer clients should consider costless collars beyond.

Natural gas lost 63c to settle Friday at $3.941 amid warmer changes in the weather forecasts. In Europe, traders are paying close attention to Russia-Ukraine developments as Russia sends about 4 Bcf/d through Ukraine on its way west. The Europe and US market are not currently linked by economics, in our view. Exports of U.S. LNG should keep moving at maximum rates, regardless of the Russia-Ukraine outcome.

Here in the U.S., FERC has granted Venture Global authorization to export commissioning cargoes of LNG. Venture Global’s modular facility in southern Louisiana is the last new-build LNG in the U.S. until the Golden Pass facility comes online perhaps in late 2024. Following Cheniere's new Sabine Pass “Train Six” that recently came online, the addition of Venture Global’s plant will bring potential feedgas flows for LNG up above 14 Bcf/d. Daily U.S. LNG deliveries have already been bumping up against 13.2 Bcf/d this year. Strong consumption from U.S. LNG is great for demand today, but the gas market will have to wait nearly two years before another new facility comes online. Gas production is likely to keep growing during this time period and could weigh on prices, especially in 2023.

AEGIS hedging recommendations continue to be collars for the whole curve. In aggregate, the Nymex forward curve still carries an abundance of call-skew. This is beneficial for producers looking to utilize costless collars. Even as Summer 2023 is of some concern with no new LNG demand expected, collars still look attractive. For example, while the Summer 2023 swap traded at $3.31 on Friday, a costless collar could be constructed with a floor of $3.00 and a ceiling of $3.74. Your quotes would have been slightly different, but the Summer 2023 strip continues to have call-skew!