Week Ending March 4

Oil prices continue to soar as global supply gets upended. WTI finished the week at $115.68/Bbl, up to $24.09. Yeah, you read that right, $24/Bbl.

Analysts estimate that about 4 MMBbl/d of Russian oil supply has been disrupted. According to JPMorgan, about 70% of Russian oil is struggling to find buyers. This statement may surprise you, because so far, energy has not been included in sanctions levied on Russia. Buyers of Russian crude have been “self-sanctioning,” some choosing not to do business with Russia, whether for moral issues or the added risk that future sanctions may target energy. News broke Friday afternoon that the Biden administration is weighing a ban on U.S. imports of Russian crude. Oil responded by rallying further into the close.

There are clear scarcity concerns when it comes to oil supply. There are only a few supply sources that could relieve some pressure on price, and even those might not be enough. First, many consuming nations have agreed to release 60 MMBbl to provide stability to oil markets. The oil market looks to mostly be ignoring this. Also, Iran is rumored to be near the finish line of getting a nuclear deal, which could provide the globe with an additional 1.5 MMBbl/d of production. But more immediately, Iran also has about 105 MMBbl on the water in tankers, ready to hit the market if sanctions are lifted, according to Kpler. Lastly, some have called on OPEC core members (Saudi, Kuwait, UAE) to boost production beyond their quota. OPEC has so far resisted these suggestions and, in fact, decided to follow through with only the scheduled 400 MBbl/d increase for April.

For producers, now may be a good time to add volumes and take advantage of this unprecedented rally. A concentration of bullish items compounding each other has led to prices rising quickly. They could come off quickly if the stressors are removed.

AEGIS recommendations remain swaps for 2022 and collars in 2023. However, collars may make sense as soon as 2H 2022, because option volatility is high; collars are effective at mitigating high premiums and high volatility in options. Collars are also useful to fight the extreme backwardation.

Henry Hub gas futures had an impressive showing over the last week but little fundamentals to support the rally. The prompt-month contract (Apr ‘22) gained 54c week-over-week to settle at $5.016, and the buying lifted the entire curve. The probable causes? The EIA reported a 139-Bcf withdrawal for the week ending February 25, which was slightly stronger than analysts' estimates. Further, the stat marked the loosest supply-demand balance in months when adjusting for weather. Last, some cold air mass promised to dive deeper into the US in the next two weeks.

Perhaps some of the price action resulted from sentiment spillover from foreign markets. The prompt-month Dutch Title-Transfer Facility (TTF) price and Japan-Korea Marker (JKM) prices touched record highs this week, with the former settling at $61.75/MMBtu on Friday, March 4.

AEGIS hedging recommendations are costless collars for most. Call skew has increased over the last week, even affecting Summer '22 and Summer '23 contracts. The Cal '23 costless collar combination is printing around $3.35 x $5.22 versus a reference swap of $3.95. That's an upside-to-downside ratio of about two to one.