Week Ending July 8

WTI came under heavy selling pressure during the short holiday week, finishing $3.64 lower, to settle at $104.79 on Friday. On the first trading day of the week (Tuesday), WTI fell $8.93/Bbl amid recession fears and a “risk-off” trade across multiple asset classes. On top of that, the U.S. dollar spot index has continued to strengthen, reaching a new decade-high on Thursday of $107.13. A rising dollar ordinarily contributes to weaker (or, not as strong) oil pricing.

There is growing sentiment that oil demand growth is at greater risk than previously thought. The shift has created an interesting dichotomy of price outlooks from major banks and analysts. After dissecting competing views in the oil market, we notice forecasts greatly depend on assumptions for demand, rather than supply. For example, Goldman Sachs analysts, who have been bullish for some time now, suggest that oil demand remains resilient and concerns about the impacts of a recession are overblown. GS believes only higher prices can help reduce demand since supply growth is hard to come by.

In contrast, Citibank made headlines this week when its top analysts made a case for much lower oil prices. Citi suggests WTI will average $75 in 2023 and remain in the low $50s for the three years following, in their base case. Why are they so much lower than the market consensus? Their expectations of demand are much lower. The bank focuses on historical analogs of recessions to make the case that demand-side risk is underappreciated.

As uncertainty lingers, volatility remains high. Collars have been our go-to recommendation as it allows for protection to the downside (at a reasonably high floor), and material participation to the upside. AEGIS remains bullish on the oil curve, but real risks do remain. No one can tell you how deep a potential recession could cut in the coming year, so a sound risk-management policy can help you meet your goals whether the market rallies further or pulls back.  

Natural gas prices have shown signs of life this week, picking up around 5.31%, or 30.4c. The rally came after EIA announced gas inventories only increased by 60 Bcf, well below analysts' estimates of 75 Bcf. Furthermore, production has seemingly backed off after touching a year-to-date high of 97.6 Bcf/d two weeks ago. Lastly, the weather has shifted to more bullish through the end of July.

More on that surprise storage number: Analysts were too bearish on the supply-demand balance by more than 2 Bcf/d. The small storage injection was even more perplexing to analysts because they had been too bullish (by +10 Bcf) in each of the two previous weeks. Most are struggling with accurately measuring the current market's supply-demand balance, and it’s creating price volatility. Part of it is a modeling error, but data outages at the EIA (form EIA-930 is relevant here) also have removed insight into the power markets.

In June, a late heat wave made that month the second-hottest on record. It’s happening again in July. We are now seeing the July forecast become more bullish. The gas-weighted degree day total has picked up 13.1 CDDs (1 gas-weighted CDD = 1.114 Bcf of power demand for gas) since Wednesday, to bring the July CDD total to its highest mark yet, at 374.2 CDDs. This would be roughly in line with the 2020 total of 377, which was the third-warmest July since 2000.

AEGIS hedging recommendations continue to be costless collars throughout the curve. We have had this recommendation for several months because of the call skew in the market. In a costless collar, you sell a call option, while buying a put option. If call options have high valuations, the call option's extra value effectively increases the amount of downside protection you can afford. For example, a Winter' 22/'23 costless collar was available on Friday at around $5.50 x $7.27 while the Winter ‘22/’23 swap was  $6.031.