Week Ending February 25

It was a wild week for the oil market, but you wouldn’t know it if you looked at the weekly changes for WTI. The prompt-month April contract finished Friday at $91.59, only $52c higher from a week ago. Was WTI overpriced a week ago? Underpriced now? Is any of this rational?

After Russia started its invasion of Ukraine on Thursday, WTI reacted violently, surging to over $100/Bbl. However, in concert with a realization that Western economies were not going to target Russia’s energy sector, prices pared all the day’s gains. It’s possible that the oil market was already pricing in potential disruption to oil supplies last week. Then, prices jumped on the knee-jerk reaction to the actual invasion of Ukraine. After supply threats were deemed less likely, WTI prices returned to near $90/Bbl.

Another explanation for the lack of a sustained rally is potential Iranian barrels hitting the market. Iran said they are close to returning to the 2015 nuclear deal after nearly ten rounds of diplomatic talks with the U.S. and Europe. Iran has about 105 MMBbl of oil on vessels waiting to enter the market, according to Kpler. In addition, Iran would also be able to export an additional 1.5 MMBbl/d if sanctions were removed.

The situation in Ukraine is fluid, so uncertainty will likely create volatility. Even if energy sanctions are not utilized, disruptions to physical flows or buyers shying away from Russian crude could increase prices.

AEGIS hedging recommendations remain swaps for the balance of 2022 and collars after that. Most of our producer clients are looking further down the curve than the next few months, and with steep backwardation and the prospect of supply scarcity, costless-collar structures can be an attractive piece of the portfolio.

International natural gas prices stole the show this week following the Russian invasion of Ukraine. Europe’s gas benchmark TTF soared by 40% to over $50/MMBtu on Thursday before receding to a much smaller gain on the week. TTF finished $5.56 up on the week at $30.12/MMBtu.

Russia’s aggression caused Germany to halt the already-complete $11 billion Nord Stream 2 pipeline (NS2). The pipeline would be able to provide Germany, and therefore other European nations, with an additional 5 Bcf/d of supply, from Russia, once in full operation. Some analysts are calling the project dead, but many believe the in-service date will only be delayed. Either way, not having the NS2 gas will keep Europe reliant on imported LNG and, likely, some conservation, for a while.

Gas producers in the U.S. are unlikely to see the benefit from higher European gas prices as the U.S. already exports all the gas it can. Henry Hub moved little this week as gas prices ebbed and flowed with changes in weather forecasts. The April contract finished the week up 10c to $4.47/MMBtu. The gas market in the U.S. continues to look undersupplied compared to previous years and is fundamentally bullish. Therefore, when weather is compliant (that is, cold, until we get to May), we should expect outsized rallies. The options market still agrees with a bullish leaning as call skew continues to be elevated across the curve.

AEGIS hedging recommendations are costless collars for most. Portions of next winter’s gas strip are offering eye-popping ceilings. For example, a 1Q 2023 costless collar was $3.00 X $11.00 on Friday with a reference swap of $4.69. The floor is $1.69 lower than the swap, but the ceiling (call strike) would be $6.31 higher. This illustrates the extraordinary call-skew present in peak winter.