Week Ending February 18

The Ukraine-Russia crisis dominated other factors affecting oil price this week. Headlines pushed crude prices around in a wide range, topping near $96 on Monday before eventually settling Friday at $91.07. The geopolitical risk premium baked into the oil market due to Ukraine was somewhat overshadowed by news that Iran may be close to a new nuclear deal.

On Wednesday, a tweet from Iran’s top negotiator said a nuclear deal with world powers is “closer than ever.” Iran may be getting closer to a deal to return to the JCPOA agreement and be allowed to export more oil. Many estimate Iran likely has near 1.5 MMBbl/d of incremental barrels it could release onto the market. This amount of crude could shift the balance in supply and demand for 2022.  

Many bullish oil calls for 2022 and 2023 assume robust demand growth and discount the upstream industry’s (OPEC and non-OPEC) ability to supply the globe with enough oil. Those in the bear camp say oil prices will fall in 2022 due to oversupply. The bulls have some good data: oil inventories in developed countries have fallen to nearly 400 MMBbl below the rolling five-year average. A steep reduction in inventories and rising demand have reduced the days of working inventory (DOWI). At a relatively low level of DOWI, the market has scarcity concerns. Oil prices can rapidly rise as the physical market is exceedingly tight. At the same time, if the bears are right and inventories start to build, price could retreat quickly.

AEGIS hedging recommendations are for swaps for the balance of the first half of 2022 and collars after that. Producers looking to add volumes in the next four-to-five months should also take a look at purchasing puts. In the near term, the lack of time value in the options market can make buying this downside-only protection more palatable.

Natural gas prices had a strong showing this week as the prompt contract (Mar ’22) picked up 48c or 12% to finish at $4.425/MMBtu. The rally extended beyond just the near-term contracts as both the Summer ’22 and Winter ‘22/’23 strips picked up 39c (9.5%) and 33c (7.7%) to finish at $4.80 and $4.93.  

Much of this week’s price action can be attributed to colder weather forecasts. The price gains were concentrated in the first three trading sessions, as forecasts moved colder and colder. On Thursday and Friday, prices retreated; the EIA reported a withdrawal that was slightly below analysts’ estimates, and weather forecasts did not imply any more demand gains.

Demand gained this week, and it’s probably permanent. Gas volumes to LNG facilities set a new record high as flows to the new Calcasieu Pass plant continued to ramp up. The facility has increased gas intake rapidly over the last six weeks and received nearly 450 MMcf/d on Friday. The facility should have a nameplate of around 1.5 Bcf/d once all 18 modular liquefaction trains are commissioned. With Sabine Pass’s newly-built Train 6 entirely in service, Calcasieu Pass is the last new LNG demand capacity until 2024. Depending on how much production grows during this period, the lull in new facilities could contribute to a looser supply-demand balance in late 2022 and 2023.

AEGIS hedging recommendations continue to be collars throughout the curve. The amount of call skew present in the options market provides an unusual opportunity to capture greater upside, with minimal sacrifice on your floor. Call skew is most present in the winter. A good example, with the Winter ‘22/’23 costless collar printing around $3.90 x $7.06, vs. a reference swap of $4.616. That’s a ratio of 3.4c of additional upside for every 1c of downside! Still, even next summer, a costless collar would provide 1.38c of upside per 1c of downside ($2.90 x $4.21 vs. swap of $3.45), meaning that your opportunity cost is relatively low. This phenomenon is uncommon, and it’s worth considering for your hedging portfolio. *Please note the prices above are mids