Week Ending May 27

Oil eked out a small weekly gain heading into the holiday weekend. WTI settled at $115.07 on Friday, up $1.84 on the week. Bal 2022 found more support than the prompt month (if we include the roll of the contract from June to July), rising by $5.13 to $107.36. Cal 2023 had similar gains, finishing at $91.45, up $4.12 on the week.

Rising global fuel prices continue to weigh on consumers and push governments to intervene. The Biden administration is reaching out to oil companies to inquire about shuttered refineries, according to Bloomberg. The average retail gasoline price remains near all-time highs in the U.S. at $5.53/gal, according to AAA. Diesel prices are much the same as product inventories are at the lowest in 10 years.

China and India prove willing to take advantage of shunned Russian oil exports. A record amount of Russian oil is aboard tankers, headed to India and China. According to ship tracking firm Kpler, up to 79 MMBbl of Russia’s oil is on ships. That is more than double the 27 MMBbl that was floating or in transit just before the February invasion of Ukraine. Asia’s ability to absorb some of Russia’s exports ameliorates the global supply shortage that would arise from removing Russian petroleum. Time will tell if countries like India, which are likely to receive political pressure from the U.S. for supporting Russia’s oil industry, will continue buying. Europe is still in the process of working through a policy to ban Russian oil imports. The embargo has been on hold as countries heavily dependent on Russian energy are against the measure.

AEGIS hedging recommendations remain costless collars for those looking to add volumes. Our view remains that the forward curve is undervalued and has more risk to the upside. The market is rightly concerned about supply scarcity. Recession concerns continue to grow, but the impact on oil prices may be muted for now, because the likelihood of excess oil supply is quite low, even if the economy slows.

Natural gas prices have kept market participants on the edges of their seats, yet again, reaching a 14-year high. This week, the June '22 Henry Hub contract rallied by 82c to expire at $8.908. The further-dated strips have also rallied but have been outpaced by near-term contracts, leading to expanding backwardation. The rolling prompt-month contract gained 66c from last week's settle to $8.083, while the Summer '23, and Winter '23/’24 strips gained 22c and 23c to $5.057 and $5.358, respectively. Friday is the first time Summer ’23 has had a daily settle over $5.

The EIA reported an 80-Bcf injection in inventories (for the week ending May 20); it was11 Bcf smaller than the average analyst estimate of 91 Bcf. In other words, the market was about 1.5 Bcf/d tighter that week than the market supposed. Further, when netting the effect of weather, this week's storage stat was undersupplied to the five-year average for the first time since April 1, 2022. While it is too early to make any declaration based on one stat, it should be a good sign that demand may not have been too affected by the run-up in price. However, there are signs that production has been rising quickly since the end of winter.

AEGIS hedging recommendations remain costless collars for natural gas because of the opportunities in capturing “extrinsic value” via call skew in the options market. This gas market remains fundamentally undersupplied, and therefore, price risks are likely skewed to the upside. Further, even summer strips have call skew of over 2:1. A summer '23 costless collar for a $4 floor is printing around $4 x $7.26, with an underlying $5.00 swap value . In other words, you participate in prices (as a producer) if prices rise all the way to $7.25 (increase of $2.25), but you’re protected quickly if prices decline to beyond $4 (a $1 drop). Winter tenors have shown a call-to-put ratio of 4:1 in some cases!