Week Ending April 22

West Texas Intermediate settled lower on the week, for the third time in a month, at $102.07. The oil market has competing themes this week with both demand and supply. For demand, China’s Covid-19 lockdowns continue to linger and are estimated to have cost the oil market about 1.1 MMBbl/d in demand. The future of Russian oil supply was put at risk after Germany announced on Wednesday its own phase-out of Russian oil imports. Russian oil accounted for about a third of Germany’s oil imports last year.

A global shortage of petroleum products, specifically distillates, has helped the Nymex 3:2:1 crack surge to the strongest in data going back to 1986. The 3:2:1 crack spread estimates a refinery’s gross profit per barrel of oil refined. It mimics the product yield at a typical refinery: for every three barrels of crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel. The expanding crack margin could result in stronger crude consumption for the production of fuels.

Adding to supply concerns this week was unrest in Libya and production curtailments. Libya’s oil production has fallen by about 500 MBbl/d, to current output of 800 MBbl/d, the lowest in months. Libya’s largest oilfield, which pumps 300 MBbl/d was closed on Monday after protestors demanded the prime minister quit, according to Bloomberg. Outages in Libya come often, but the impact on the oil market is typically small unless outages last for long durations.

The oil curve remains undervalued by our estimates. Our hedging recommendations are similar to last week’s, with collars throughout the curve. We expect more upside potential, and there is call-skew in the front six-to-eight months of the curve. That call-skew, which is particularly rare in the crude market, has moved closer “even money” where a put and offsetting call are equidistant from the forward curve. This means a producer would not have to sacrifice more upside than they receive in downside protection.

Gas prices finally showed some signs of weakness, posting their first weekly loss in over five weeks. Even after this week's rout, gas prices are up over $1 for near-term tenors, month-to-date. The bad news? This week's sell-off affected the entire curve, with the Summer '23 and Winter' 23/'24 strips both posting losses, of 57c and 44c, to $4.174 and $4.534. Now, those two strips are only 20c and 25c higher than April 1 levels.

The EIA announced a gas-inventory build that was much larger than analysts' expectations. The mean expectation was a +38 increase, but the actual was +55. That 17 Bcf gap implies that analysts misunderstood the supply-demand balance and are now wondering if demand was 2.4 Bcf/d lower, if supply were somehow higher, or perhaps a combination of both. This storage announcement marked the second consecutive deterioration in the supply-demand balance, per our models. Let's give it more time; this could be shoulder-season noise.

Production is up for April but still below its December-2021 high and roughly unchanged year-over-year. Demand has been robust this month. April may well be the fourth-best April in history for gas demand. That cooler weather boosted immediate demand, and also kept inventories from rising.

AEGIS recommendations continue to be costless collars throughout the curve. Barring production growth or uncooperative weather, the gas market will likely remain undersupplied this summer and winter. We believe (with the caveat of production growth) price is less likely to slip much lower than remain firm or move higher. This upside-risk sentiment has also shown up in the options market; call skew is strong through the next four seasons.