Week Ending April 8

Despite the mostly negative news for the oil markets, WTI finished the week down only $1.01 to $98.26. Tacking onto last week's planned SPR release from the U.S., OECD/IEA member countries pledged to release 120 MMBbl of crude oil and oil products from emergency stockpiles. In recent weeks, oil-promised reserve releases have totaled 240 MMBbl (180 from the U.S.; 60 from IEA members). The front of the oil forward curve has been pressured lower, which was the goal.

For oil demand, China's zero-tolerance policy for Covid-19 cases has kept Shanghai, home to 26 million people, on lockdown for longer than many expected. Draconian lockdowns have contributed to just north of 1 MMBbl/d of fuel demand destruction over the past month, according to analysts at FGE.

Near-term prices are down, but later tenors are remarkably resilient. Chinese lockdowns and strategic petroleum releases have relieved some of the oil-market tightness in the near term. This has pressured oil lower in the first six months of the WTI forward curve, but more longer-dated tenors have seen prices rise. For example, WTI contract months through June 2023 are lower today than they were a month ago; beyond that, the curve is higher.

AEGIS hedging recommendations for producers are collars for the next 12 months as we believe the curve is undervalued and a rare call-skew exists in these months. Call-skew doesn't persist much past a year. However, we believe the fundamentals support a higher curve, so we suggest collars in the longer-dated tenors as well.

Gas continued to strengthen this week, extending gains and even touching a 13-year high of $6.538 on Thursday. The prompt-month (May' 22) contract retreated slightly on Friday by 8c to finish at $6.278, for a week-over-week gain of 55.8c, which marked the fourth consecutive week that gas prices finished in positive territory. There's a lot of speculation behind what's driving this rally, but there are likely many causes.

This market is undersupplied and has been for over a year. Further, we are entering injection season with inventory levels almost 400 Bcf lower than last year; this means inventories may build slower than normal this summer, without the help of weather. So either production needs to rise, or demand needs to be killed for this market to reach equilibrium. Higher prices encourage both of those levers to move.

This week, there were a few developments but nothing that would explain the rally in near-term prices. There has been a pickup in LNG development, but these projects wouldn't impact the market for around 3-5 years. According to Reuters, at least a dozen LNG executives met with European energy officials in Houston on Wednesday. If more long-term offtake contracts are reached with Europe, it could encourage more final investment decisions and more LNG liquefaction capacity, which would be a boon for long-term gas demand.

AEGIS has been recommending collars for almost any tenor. Call options are generally more expensive than put options, especially in winter. The recent price rally has resulted in more "call skew," making costless collars a hedge structure that a gas producer should consider. The argument for a costless-collar structure is an easy one to make. The eye-popping ceilings current being quoted (we saw a $3.25 X $10.00 quote for 2023 this week) make swaps less attractive.