Week Ending March 25

WTI rallied 8.78% to finish the week ending March 25 at $113.90/Bbl. Oil prices received a lift Friday morning after Yemen rebels attacked an oil depot in Jeddah, Saudi Arabia. Earlier in the week, the European Union and U.S. announced an agreement to cut reliance on Russian natural gas but declined an oil embargo.

Russia’s war on Ukraine soon enters its fifth week; it has roiled an already tight commodity market. Many energy firms are choosing to shun Russia’s crude. However, China and India appear to take advantage of steep discounts and absorb some of those barrels. The real question is: How much Russian oil production will be impacted on an ongoing basis? JPMorgan suggests that the oil market’s “extreme aversion” to Russian crude will subside, and it expects a perpetual 1 MMBbl/d impact starting next month. The removal of 1 MMBbl/d in an already tight market is supportive for oil prices, but it likely reduces the risk that oil has a moonshot to $150-$200/Bbl appearing in some headlines. Those high price assumptions probably assume many more Russian barrels will be impacted.

AEGIS hedging recommendations are costless collars for the second half of 2022. You don’t have a bullish view on price to covet the upside-friendly collar. The remainder of WTI for 2022 has call-skew, where calls are priced higher than are puts for the same distance from the curve. It’s the first time since at least 2015 that the front twelve months of the curve has call-skew. Slight put-skew is more normal for the crude market. For 2023 and beyond, we suggest collars as well, but not because of option skew. We believe the curve is undervalued, and a costless collar will allow more exposure to higher prices versus a swap.

Over the last five trading sessions, natural gas prices have posted impressive gains to bring prices up to their highest levels in almost seven weeks. The upward-biased price action was likely the result of cooler weather forecasts for the U.S.-Northeast region. In addition, LNG feedgas demand has been robust, holding above 12 Bcf/d each day of March, while U.S. lower-48 dry gas production has held steady near 93 Bcf/d. The result of all these has been a recently tighter market, which was already moderately undersupplied when controlling for weather.

The big headline of the week? Russian president Putin announced that “unfriendly” states might be required to pay for their gas in rubles, reinforcing energy security concerns and pushing the U.S. and European Union to a deal that reduces Europe’s reliance on Russian gas. Europe, which receives around 40% of its gas import from Russia, would have to reduce its imports by two-thirds if no replacement were found. The deal specifies that the U.S. sends 530 Bcf/year (15 bcm) of gas to Europe. The U.S. was already on pace to surpass this rate by the end of 2022. Still, this amount of gas pales in comparison to the 5,425 Bcf supplied by Russia in 2021. The deal is not likely to impact the actual physical flows in the short term, as prices already encourage cargoes to move to Europe. However, it could impact long-term LNG demand and perhaps smooth the way to more construction of LNG facilities in the U.S. over the next several years.

AEGIS hedging recommendations are now swaps for Summer ’22 and collars for Winter ‘22/’23 and beyond. The current Summer ’22 swap closed near $5.65, only 5c shy of the Winter ‘22/’23 swap level of $5.70. This narrow spread between the two strip prices is a very uncommon phenomenon. Historically, summer-winter usually trades around 25c, a level of contango that incentivizes injections for storage. This could mean either Summer ’22 needs to move lower, or Winter ‘22/’23, higher, and our view is that the latter is more probable. Further, the options market shows more call skew during winter, making the structure even more attractive.