Week Ending August 5

WTI came under heavy selling pressure this week, finishing at $9.61 lower to settle at $89.01 on Friday. This was the biggest weekly decline since early April as evidence of a global economic slowdown curbing demand grows. Oil at $89 is now at its lowest level in six months.

Contributing to the fall in price was a bearish inventory report from the EIA as crude stockpiles increased by more than 4 MMBbl. Meanwhile, the four-week average of U.S. gasoline consumption, the best indication of the country's demand, is currently more than 1 MMBbl/d below pre-Covid seasonal averages. The drop indicates that the glimmer of demand recovery witnessed last week was only temporary or noisy data. Despite pump prices falling for seven straight weeks, they haven't been sufficient to get drivers back on the road due to inflation still constraining consumer spending.

On Wednesday, OPEC and its allies, including Russia, decided to modestly increase production in September by 100 MBbl/d. The bloc’s delegates expressed concern that a possible US recession and Covid-19 lockdowns in China will dampen consumption. Additionally, the group warned about "severely limited" spare capacity. It is believed that UAE and Saudi Arabia are the only two oil producers believed to have material spare oil production capacity. Analysts estimate this spare capacity to be between 1-2.5 MMBbl/d, low by historical standards.

Crude's rally, which had been on the rise for the first five months of the year, has been thrown into reverse, with losses extending this month after declines in June and July. The selloff, which has erased gains brought on by Russia's invasion of Ukraine, will likely lessen the inflationary pressures coursing through the global economy. 

AEGIS hedging recommendations remain costless collars. A collar would allow a price floor to be set to protect against deteriorating prices and allow for upside participation if prices realize higher than the current strip.

Natural gas prices finished the week not far from where they started, ending 27c higher, though the market has shown elevated intraday volatility. While weather forecasts for August have been turning cooler, Freeport LNG announced on Wednesday that its Freeport LNG export facility might be back online sooner than anticipated. This news led to a nearly 10% intraday jump on Wednesday to a high of $8.48 before paring gains to near $8.00.

Freeport LNG announced that the facility would return to partial operation in October. While many expected the facility to come back online in October, the market was surprised that Freeport would be able to process 2 Bcf/d of gas instead of a gradual return to normal capacity that was expected.

Weather forecasts for August initially predicted near record high temperatures like the ones seen in July; however, the forecast has been revised lower (cooler) as the week has progressed. As a result, August weather is expected to align with the 10-year climate normal and could even be slightly below-average (the first time this summer). In addition to weather-driven demand increases in the natural gas-fired power generation sector, the forecast's moderation has put pressure on prices.

Also, on Thursday, the EIA reported a natural gas storage injection of 41 Bcf for the week ending July 29. This compares to a median estimate of 29 Bcf, a survey range of 19-44 Bcf, and last week's injection of 15 Bcf. This week's larger-than-expected injection places U.S. natural gas inventories at around 2,457 Bcf. Total working gas in storage remains around 337-bcf (12.1%) below the five-year average and 268 Bcf lower (10%) than last year. Analysts were caught off-guard with this week’s plum 41 bcf injection, but when averaging with the previous week’s bullish miss, the two stats combined came in at the median of surveys.

We continue to recommend hedging with costless collars for most clients. This recommendation comes from the amount of call-skew provided by the options market. A costless collar involves buying a put option financed by the sale of a call option. Due to the relative expensiveness of call options, referred to as "call skew," one can receive a higher amount of premium from the sale of the call to purchase a higher strike put, thereby resulting in a higher floor on the collar.