Week Ending March 18

Oil prices remain highly volatile and elevated amid Russia's war on Ukraine, but the oil market was already buoyed before Russia invaded its neighbor. Some Russian oil supply has been removed from the market. The IEA reported this week that it estimates about 3 MMBbl/d of Russian oil output could be shut-in by April. But, let's go back to early February and assess the health of the oil market before the Russian supply was shunned.

According to the IEA, the OECD total industry stocks were 336 MMBbl below their 2017-2021 average at 2,621 MMBbl. Inventories were at their lowest level since 2014. West Texas Intermediate was trading in the high $80s to low $90s in late January and February. Many analysts were expecting higher prices and calling for higher prices in the future based on what was known and expected one to two months ago.

Fast forward to today. Russian oil has become a pariah, with many consuming nations trying to find ways to source crude oil and oil products elsewhere. Some can, and some can't. Estimates are that at least 3 MMBbl/d will be disrupted in a matter of weeks. The loss of millions of barrels from Russia is difficult, if not impossible, to offset with the tools and options available to the globe. Oil prices will likely continue to stay elevated, even if we never reach some of the eye-popping price estimates many aggressive analysts say are possible. Prices indeed could climb another step higher under the right circumstances, considering the globe has limited short-term supply choices.

AEGIS sees price risk skewed to the upside throughout the forward curve. The probability of prices moving higher along the forward curve is greater than moving lower at this point, in our opinion. Prices could relax if a few supply levers are pulled: consider Iran or a production increase from the core of OPEC.

AEGIS hedging recommendations remain costless collars in 2H 2022 due to higher volatility and call-skew. As we believe price risk remains to the upside, especially further down the curve, we recommend costless collars to allow for more upside participation.

Natural gas prices ended the week without any “fireworks,” and the winter volatility has faded into the background. Gas prices for all of the strips finished the week in positive territory, if only slightly. The prompt contract gained around 14c, while the Summer ’22 and Winter ‘22/’23 gained 8c, and 5c, respectively. The increases placed the latter two strips at $4.95 and $5.065.

The weather forecasts for the remainder of March swung bullish towards the middle of this week, only to give up the forecasted demand gains on Thursday and Friday. The EIA also reported a 79-Bcf draw on inventories, and according to Platts, there will likely be two more draws to finish the season. This would mean the summer inventory build-up will start right on time, at the end of March. The current end-of-season inventory number, a proxy for where traders see end-of-season inventory levels, being traded on ICE is 1,434 Bcf. Again, normal, but it is lower than the market expected two months ago.

The most significant changes in this week’s supply-demand backdrop came from production and wind-powered electricity generation. Production rose from 92.6 Bcf/d Last Friday to 93.8 Bcf/d for a week-over-week gain of around 1.2 Bcf/d. Likewise, wind-powered electricity generation increased by 55.9 GW, or 1.44 Bcf/d equivalent, likely weakening this week’s inventory draw (announced next Thursday). However, according to our models, the weather-adjusted supply-demand balance is still tight relative to the five-year average.

AEGIS hedging recommendations are costless collars for most. Still, given where prices are for the Summer ’22, Winter ‘22/’23 strips, depending on your portfolio, swaps make sense and provide the opportunity to raise your weighted-average floor price.