Week Ending September 16

Oil posted a third-straight weekly loss. WTI lost nearly 2%, or $1.68, to finish at $85.11/Bbl, continuing a bearish trend that started in July. Concerns about a hawkish Fed rate hike stifling global economic growth and demand still weigh on oil prices. A strong U.S. Dollar and weak Chinese demand were already wilting prices.

Inflation is still running quite hot. U.S. CPI, an indicator for household-goods inflation, moderated slightly, from 8.5% in July to 8.3% in August. It slightly exceeded the 8.1% forecast made by WSJ economists. Tuesday's inflation report was highly anticipated ahead of the Federal Reserve's upcoming monetary policy meeting next week. The market expects this bearish report to increase the probability of another large interest-rate increase. It could be the third-consecutive 75 basis-point hike.

China's fuel demand has been severely affected this year by strict COVID-19 control measures. Reduced mobility has hindered economic activity and, therefore, oil demand. In its monthly report, the IEA now expects China's oil demand to drop by 0.420 MMBbl/d, or 2.7% this year, the country's largest annual drop in oil demand since 1990. The projected decline in China prompted the IEA to trim the global oil demand forecast by 0.110 MMBbl/d to 2 MMBbl/d (per year) while keeping its 2023 growth forecast of +2.1 MMBbl/d. Even as China has begun to loosen lockdowns in some regions of the country, declining refining margins and a new round of tax probes are causing some independent oil refineries, or "teapots," to face unplanned facility outages and lower processing rates. Refiners processed 12.64 MMBbl/d of crude in August, up 0.9% from July's 12.53 MMBbl/d but down 6.5% from 2021, according to the National Bureau of Statistics.

One of the major news stories affecting oil prices this week was also the U.S. DOE's remarks on their SPR restocking plan. Earlier this week, it was reported that the Biden administration is considering refilling the Strategic Petroleum Reserve if oil prices dropped below $80/Bbl to safeguard U.S. oil production growth and prevent a sharp decline in crude prices. However, DOE issued a statement on Wednesday saying that no "trigger" price is being considered, and oil deliveries to SPR are unlikely to start until after the fiscal year 2023. The timing of this refill is crucial because it might have a short-term impact on prices, and it may also serve as a steady source of demand for as long the DOE intends to replenish the SPR.

AEGIS hedging recommendations for crude oil remain costless 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.

Prompt-month natural gas prices exhibited more volatility than usual this week but ultimately finished only 2.6% lower at $7.76. Despite losses in near-term tenors, the Summer ’23 strip gained 10 cents, while Winter ’23/’24 gained 14 cents to end at $5.62 and $5.98.

Prices rallied 10% on Tuesday following news that a railroad strike could happen as soon as this weekend. However, the railways and labor unions reached an agreement late in the week. If a strike were to take place, it could affect U.S. energy markets and the broader U.S. economy. Railways are the primary transportation method for coal; therefore, a shutdown would significantly reduce the movement of coal to power generators. In addition, coal inventories are already at a historically low level; any disruption would likely lead to more gas demand for power generation to fill the void. After the railroads and unions reached a deal, natural gas prices retreated. 

Gas production remained robust throughout the week averaging about 99 Bcf/d, according to data from IHS PointLogic. However, production failed to surpass the yearly high set last week at 100 Bcf/d. This rise in production is coming from the Permian Basin, while the Haynesville play and Appalachia have decreased output over the same period.

What was mostly mild weather this week will soon be replaced by hotter temperatures. This rise in temperatures should increase the amount of gas demanded by the power sector. By next weekend though, temperatures are expected to return to the 10-year normal and continue their seasonal decline.

Call skew is still pronounced in winter tenors, meaning that call options are relatively expensive compared to put options. For a producer hedger, this means that using a costless collar (buy a put and sell a call) can be a good way to achieve a high floor while sacrificing less-than-usual upside. For summer tenors, this market discrepancy isn’t as pronounced, so let us tailor your hedges based on the amount of protection you need.