Week Ending June 24

West Texas Intermediate finished lower for the second consecutive week, settling on Friday at $107.62/Bbl. The price of crude oil has dropped to its lowest level since mid-May, setting prices up for their first monthly decline since November. The decline is a part of a sell-off that has affected multiple commodities and asset classes, mostly sparked by concerns about a potential global recession.

Additionally, the U.S. Federal Reserve and European Central Bank raised interest rates to tame rising inflation. Oil prices have dropped despite evidence that the energy markets could remain tight in the near future as the Ukraine conflict continues and supply concerns linger.

Still-high refined product prices indicated that demand for crude is still strong. The recession worries that have been weighing on oil-linked prices for much of this week have not yet reached oil products.

The average price of retail gasoline is only a few cents less than earlier this month when the at-the-pump price set a record of more than $5/gallon.

This week, President Biden asked for a suspension in federal gasoline tax collections. This is meant to be a relief to the consumer; however, it might lead to a potential demand rebound and have the unintended effect of further depleting product inventories and sustaining prices at their existing levels. For Fuels, refineries are having difficulty producing as much gasoline and diesel as is anticipated, despite the government's efforts to boost consumption through tax cuts.

We remain bullish on the forward curve, and we believe price risk is skewed toward higher prices (than the forward curve) into 2023 and 2024.

Our hedging recommendations remain costless collars. A collar will allow producers to protect themselves against a severe recession scenario while allowing for upside. This reflects our view that the backwardated oil curve is undervalued and a price appreciation in later tenors is more likely than not.

The prompt-month Henry Hub futures contract fell by 72.4c on the week to end at $6.22. Since the Freeport LNG outage, which began with a serious fire at the facility on June 8, gas has posted its second-consecutive weekly loss. An interesting piece of this week’s price action was that selling pressure was pronounced throughout the curve. The Summer ’23 and Winter ‘23/’24 prices fell by over 6% week-over-week; large, but still smaller than the 10.1% fall in Winter ‘22/’23. Prices in the front of the curve are down by over 30% since the start of June, while the back is closer to a 20% decline.

Weather forecasts had been very bullish so far this month but have softened as of late. The June degree-day total (more degree days translates to higher gas demand for cooling; see NOAA definitions here) is on track to be the second-most ever, just behind 2021’s record-breaking temperatures, and only by 2 CDDs. Forecasters are expecting July to be above average. but everything beyond two weeks is notoriously unreliable.

There haven’t been any updates on Freeport LNG this week. However, Cheniere finally reached an FID on its $8B Corpus Christi (CC) expansion project. The expansion will increase the site's liquefaction capacity by 1.5 Bcf/d and is expected to come during the “third wave” of LNG projects anticipated in 2025-2026.

Our trade recommendations are still collars throughout the curve. The current call skew in the gas market, which is well above historical norms, makes the structure too attractive to pass up. A winter ’23/’24 costless collar is printing at around $4 x $17, vs. a swap of $6.229. The call skew is smaller as you move further out in the curve, but the upside-to-downside ratio is still very attractive. It allows a hedger to maintain maximum upside potential in the event of a prolonged period of higher prices while still protecting cash flows below a known floor price.