Week Ending August 26

WTI posted a weekly gain of $2.62 to finish at $93.06/Bbl. Although oil futures struggled to find direction on Friday, they held a weekly gain. The next few weeks could bring more volatility; the market is awaiting more information on a potential Iran-nuclear deal, and there are reports of possible production cuts by Saudi Arabia and its OPEC+ allies.

The United States is considering agreeing to a deal with Iran that could lift the sanctions on Iran's oil exports that have been in place since the Trump administration. The result could be more of Iran’s production and a lot of oil stored offshore in tankers, heading to the market for sale. The Iran nuclear deal is still a headline risk that goes back and forth, adding volatility to crude prices. The U.S. confirmed on Thursday it has sent a response to the E.U. on the latter’s proposal to salvage the deal. An end of sanctions would result in a phased addition of nearly 1 MMBbl/d of Iranian crude to the global markets.

Meanwhile, Saudi Arabia stated that the futures market is becoming more detached from fundamentals, and it may propose reducing OPEC+ output. OPEC+ has already been falling short of its output quotas.

Looking ahead to 2023, global demand is expected to grow by about 2.0-2.5 MMBbl/d. As we discussed in our webcast Thursday (replay link), non-OPEC nations like the U.S., Brazil, Canada, and others will need to gradually increase their output to serve this demand, all the while refilling strategic petroleum reserves. We see bullish risk in 2023.

Additionally, on Friday, Federal Reserve Chairman Jerome Powell made it clear that the Fed will keep working to bring down inflation until it succeeds, and the measures will take a toll on jobs and economic growth. He added that the Fed is focusing on bringing inflation back down to its 2% goal.

We see the need for significant increases in global production to balance the market in 2023-2024. There is an upside to prices, we believe. We, therefore, still recommend hedging with collars. A collar would set a price floor but with a cap on upside participation if prices realize higher than the forward curve. We can often construct these collars with price caps above current spot prices.

The prompt-month (Sep ’22) Henry Hub contract achieved a modest gain on the week, though most of it was, strangely, in 2023 and beyond. Yes, the prompt price set a new fourteen-year high of $9.68 and touched the $10/MMBtu mark during intra-day trading on Tuesday. But, for the week, the Winter ‘22/’23, Summer’23, and Winter ‘23/’24 strip prices posted gains of 20c (2.1%), 26c (2.9%), and 25c (4.5%), compared to a 15c (1.6%) gain for prompt-month (Sep ’22) gas.

It seems that international gas prices commanded most market-watchers attention this week. The benchmark Dutch Title Transfer Facility set new records Thursday, as the prompt-month contract (Sep ’22) blew past the $93 USD/MMBtu mark. Further, the move affected much of the Dutch-TTF forward curve, not just the near-term months: the Cal ’22, Cal ’23, and Cal ’24 strip prices are trading around $95.19, $87.07, and $56.47/MMBtu.

Now, If you think we are going to say that this huge run-up in European prices will start spilling over into U.S. gas markets, we’re not. U.S. prices should only be affected if U.S. prices are so high that export arbitrage is endangered or if TTF prices fall so far to accomplish the same. LNG would be one of the last U.S. demand sources to be impacted by increasing gas prices, so U.S. gas markets should be insulated.

Back in the U.S., Freeport LNG issued a press release this week that its facility would run at full capacity beginning in November. The announcement surprised most as Freeport LNG previously hinted that the facility would be online in October. The delay could lead to an additional 106 Bcf of gas that could wind up in storage. All the same, inventories will still be starting well below average, so even with this loss of demand, the storage path is still potentially bullish for winter prices.

In fact, we have an end-of-season projection of around 3,375 Bcf or about 200 Bcf below the five-year average of 3,650 Bcf. The ICE end-of-season swap market, a proxy for where traders see inventories peaking before winter, was most recently at 3,495 Bcf, around 120-Bcf higher than our internal forecast but still well below the five-year average of 3,650 Bcf.

We are still recommending collars for most clients, especially in the tenors demonstrating anomalous call skew. The winter tenors are an easy case to make for collars. If approached with the choice of a (Winter ‘22/’23) $9 swap or an $8 x $11.50 costless collar, which would you prefer? The collar is the usual choice. However, it gets tricky in the summer tenors, where the call skew is less pronounced. For example, a Summer ’23 costless collar is currently trading around $5 x $6.74 versus a reference swap of $5.66. In this situation, the call skew isn’t as pronounced, so it really comes down to preference. Do you value a higher floor and more revenue secured, or the ability to participate in the upside more? On average, most clients have been biased towards the former.