Week Ending May 6

Oil gained $4.08/Bbl on the week to settle Friday at $109.77/Bbl. Backwardation, a downward sloping curve, has increased as the WTI prompt contract gained $20/Bbl over the past month.

Lately, some of oil's strength has come from the European Union's proposed plan to ban Russian oil. The likelihood of a ban on Russian oil has become more probable as the EU has set exemptions for Hungary and Slovakia, two countries that would likely veto a ban on Russian oil. A European embargo would remove a major customer for the world's third-largest producer, and its ongoing impact would be to more permanently reduce Russia's ability to provide the globe with oil and oil products.

A rallying U.S. dollar and continuing lockdowns in China have offset some of the recent bullish developments. A more expensive dollar can cause foreign buyers of dollar-denominated commodities to pay more for the same amount of goods. The U.S. dollar spot index was above 103 as of Friday, the highest level since 2002. According to data from CNN, China still has over 180 million of its citizens under Covid lockdowns. Analysts have pegged the resulting oil-demand losses in China at around 1.1 MMBbl/d. China's Covid problems do, however, seem to be turning a corner for the better.

Uncertainty is the only certainty in the oil market for the time being. Fundamentally, the oil complex is leaning toward scarcity of supply, especially as summer approaches. There are serious questions about OPEC's ability to be the world's supply buffer, and Russia's aggression has made its oil a pariah. AEGIS sees the oil curve as undervalued but not without risks. A global recession is on everyone's mind; it could dent future oil demand. The extent of that possible damage is difficult to quantify.

AEGIS recommends costless collars for oil hedges. We prefer these upside-friendly structures partly because of our belief that the futures curve is undervalued. Each client's portfolio has different needs, so check with your trading contact for specifics.

June '22 gas finished 11% higher, or 78c, this week, it's second consecutive weekly gain. Friday's settle was $8.043, but gas prices reached an intra-day high of $9! The recent rally has been somewhat unusual in that it has come during the lowest demand time of the year.

The EIA reported a 77-Bcf injection into storage for the week ending April 29. This injection was larger, or more bearish compared to analysts' expectations. According to our weather-adjusted supply-demand model, this week's stat was tighter than last week's but slightly above the five-year average. If the weather-adjusted supply-demand balance remains looser than (above) the five-year average, the inventory deficit to the five-year average will narrow. The balance has been trending looser over the last couple of weeks, and it could be shoulder-season noise. Yet, this model is an excellent early-warning system for a shifting S&D.

Perhaps the supply side will help to further loosen that tight balance. Lower-48 dry gas production staged a recovery to close the week at 94 Bcf/d, or around 2 Bcf/d higher than Monday's levels.

But production is fighting against LNG, which should expand a bit more into early summer. LNG facility demand is still a little low, near 12.2 Bcf/d. Freeport LNG brought back Train 1, but then Cameron LNG took a train down for maintenance. LNG exports fluctuate the most during this time of year (and in the fall) when facilities are brought offline for maintenance in low-demand periods.

AEGIS recommendations continue to be costless collars throughout the curve. We are recommending collars for most clients unless there is a need for a higher floor price. Our primary reason is that the demand side of the market has been bidding up call options, making them expensive. A producer can sell those expensive call options and use the proceeds to buy an unusually high floor (put option). Further, if new production does not arrive soon, prices may have further upside as this market tries to rebalance itself with the tools at its disposal:  price and demand elasticity.