Week Ending March 11

Oil prices experienced their first weekly loss since Russia invaded Ukraine. WTI finished the week down $6.35, to settle Friday at $109.33. This week also marked the most turbulent week the oil market has ever experienced. Brent crude traded near $112 on Friday, more than $30 off its peak trade for the week. 

A U.S. ban of Russian crude imports helped start the week off with volatility. Many consumer nations are treating Russia as a pariah; some grades, such as those near its eastern borders, received no buyers. Even though energy sanctions haven’t been levied, except by the U.S., many buyers are conducting some form of self-sanctioning.  

The disruption in Russian crude exports comes when global inventories are already low. Threats to supply have sent the market into a frenzy. Further disruptions to Russian petroleum exports could send prices higher, but there are still multiple levers of supply that could help offset Russian losses (see our webcast). 

Iranian nuclear talks came to a standstill this week, prolonging the possibility of additional barrels re-entering the market. Analysts estimate Iran has about 105 MMBbl on the water in floating storage and just over 1 MMBbl/d of production that could supply the market if sanctions are lifted. Discussions between world powers to rejoin the 2015 nuclear accord with Iran were paused due to “external factors,” European Union foreign policy chief Josep Borrel said this week. U.S. officials have warned for weeks that the window for a deal was closing. Russia is involved in the talks, complicating an agreement. They have made new demands related to Ukraine.  

Increased volatility and a rare call-skew in the oil market have AEGIS recommending collars for the second half of 2022. Recently, we have been suggesting a swap for the balance of the year, but favorable option structures for the rest of 2022 have us changing that advice for now. We continue to recommend collars for 2023 and beyond as we see more risk to the upside in these tenors.  

Gas futures came under pressure this week. The prompt contract (Apr ’22) lost 24.1c, or 5.80%, to finish the week at $4.725. However, the selling was primarily focused at the front of the curve. The Summer ’22 and Winter ‘22/’23 strip prices posted meager losses of 11c, and 8c, respectively. Beyond those tenors, the curve was steady and even rose a little bit.

What drove this week’s price action? As usual, mostly weather. March forecasts turned horrid in terms of gas demand; March gas-weighted heating degree day forecasts lost 38 HDDs (6.5%) to finish at 545 HDDs, only 10 HDDs above the March 2021 total. However, lower-48 dry gas production fell by almost 2.5 Bcf/d on the week, which may have limited the downside pressure on gas prices and offset some of the bearish sentiment around weather forecasts. Further, LNG feedgas demand has remained robust, with Calcasieu Pass continuing to reach record-highs as it proceeds with its commissioning process.

AEGIS hedging recommendations are costless collars for most clients. There is still a discrepancy in the options market, where call options are more expensive than put options at some strikes. This “call skew” has decreased lately, but it is still present and results in some attractive costless collars. Yet, given the run-up in Summer ’22, Winter ‘22/’23 strip prices, swaps are beginning to look more attractive than they had been. Both strips are currently near the $5 mark. Beyond those tenors, we lean towards collars because the risk seems skewed to the upside, particularly given the backwardation (downward slope) in the forward curve.

If you recall, in October, we had lamented the large backwardation between this Winter strip and Summer ’22. That spread narrowed, as expected, as prices rose. Now, we’re eyeing the same phenomenon into Summer ’23. Winter ‘22/’23 gas is at $5.01, while the following season (Summer ’23) is currently trading at a $1.40 discount, or around $3.60. Producers, consider hedging using a costless collar to mitigate that backwardation through some upside exposure while also providing a price floor.