Week Ending July 22

WTI snapped a two-week losing streak. The prompt-month (now September) ended Friday at $94.70/Bbl, up 13c since a week prior. Prices hovered within a $10/bbl range this week, and futures wavered between gains and losses as the market grapples with tight supplies and signs of weakening demand, an economic slowdown, and China's most recent Covid-19 outbreak.

While crude is still up over 25% on the year, the bulk of the gains made following Russia's invasion of Ukraine have been reversed on concerns of weakening demand due to a looming recession, plus an advancing dollar value.

The European Central Bank raised interest rates for the first time in 11 years yesterday, and the market will be keenly monitoring the magnitude of the next U.S. rate hike, which is expected to be announced at next week's FOMC meeting.

Investor interest in crude oil has been suffering as a result of central banks raising interest rates to combat soaring inflation, raising worries about a slowdown that will sap demand for commodities, and raising concerns about slowing economic growth. However, the risk could be to the upside for oil prices; it may be that the USD's streak may end with the next Fed decision, while Europe seems to be tightening its money belts. The market has an eye on China's ongoing response to virus outbreaks as the nation's cases are at a two-month high this week.

Likely adding to recent oil-price weakness is Libya's restoring production, with output now above 700 MBbl/d after lifting export restrictions. Output is expected to return to 1.2 MMBbl/d within ten days.

Finally, is U.S. gasoline demand started stuttering? The fuel's crack (premium over crude), which once exceeded $60/Bbl in June, is now less than half that. At the same time, retail gasoline and diesel prices have fallen for the fourth week.

Our hedging recommendations remain costless collars. A collar will allow producers to protect themselves against a price pullback (perhaps 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.

Natural gas prices have finished higher again this week, as late-week strength moved prices well over $8. The weather has supported demand; after a near-record June, we may now have the first or second-warmest July on record.

The week's big headline was that gas inventories only rose by 32 Bcf for the week ending July 15. Analysts' estimates were in a huge range -- from 17 Bcf to 60 Bcf. There was particular uncertainty regarding the South-Central storage facilities. The South Central reported a draw of -16 Bcf, which is impressive because the Freeport LNG outage near Houston had resulted in about 2 Bcf/d of extra gas available. In fact, the weather in the area has been so hot that it has largely offset the lost consumption from the Freeport LNG outage. 

This last week's injection, was the most bullish of the injection season so far, even after we remove the extra demand of the hot weather. By our models, the gradual loosening we saw in the supply-demand balance this spring has stopped and possibly reversed to become neutral to bullish.

Our hedging recommendations remain costless collars for the majority of clients. This is not a recommendation based on a price forecast but rather a recommendation that takes advantage of the extra value in selling call options right now. The so-called “call skew” allows you to sell the call-option part of the collar for a higher premium than you would usually receive. The juicy premium can then be used to purchase a higher floor price that would not have been attainable if the skew was not so favorable.