Week Ending September 23

Oil posted a fourth-straight weekly loss. WTI lost 7.1%, or $6.02, to finish at $78.74/Bbl, continuing a bearish trend that started in July. Oil has suffered the longest run of weekly losses this year with a string of rate hikes from central banks around the world to combat inflation and a stronger U.S. dollar.

The U.S. Federal Reserve hiked interest rates by 75 basis points this week and signaled that rate hikes will continue into 2023. Officials lifted their target for the federal funds rate benchmark (short-term bank rate) to a range of 3% to 3.25%. Rates are expected to reach 4.4% by the end of this year and 4.6% in 2023, according to officials. This is a more hawkish shift than anticipated in their previous dot plot (a survey of Fed FOMC participants). Fed Chair Powell agreed that the median of the quarterly projections made by policymakers implied an additional 125 basis points of tightening this year. He added that the main takeaway was that the Fed is committed to bringing inflation down to the target of 2% and "will keep at it until the job is done."

Crude’s losses were partly capped this week by Moscow's military mobilization effort in its conflict with Ukraine, and a new impasse in negotiations to revive the Iran nuclear deal and end the country’s oil-sales sanctions.

The EU is reportedly considering a price cap on Russian oil as well as other sanctions in response to Russia's most recent escalation in the conflict with Ukraine. EU foreign ministers said that additional sanctions would include "economic and individual" measures. Additionally, three EU diplomats in Brussels said that the new sanctions would be based on the oil-price cap agreed by the G7 nations. The oil cap and other upcoming EU embargoes would likely go into effect in December. All EU member states must unanimously approve the final sanctions, but Hungary, which has frequently acted as a stumbling block when unanimity is required in the EU, will be one of the biggest unknowns.

It is also uncertain how successful a price cap would be, especially given that some of Russia's biggest consumers, like China and India, haven’t agreed to participate. In any case, IEA now forecasts that Russian oil production will decline by 1.9 MMBbl/d by February compared to prewar production when the EU ban on Moscow's exports goes into effect in December.

On the supply front, OPEC+ fell short of its oil production target by 3.583 MMBbl/d in August, according to Argus. The bloc agreed to cut its output by 0.100 MMBbl/d in October, and the recent bearish sentiment in the oil market might prompt OPEC to cut production to protect profit and maintain market stability. Does OPEC have a floor price in mind? If so, downside price risks may be capped.

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. Some AEGIS clients have elected to reduce their hedging activity in oil as prices have moved lower, but costless collars are one way to hedge for protection, and also participate in some of a price recovery, should it happen. 

Natural gas is now below $7/Bbl. Prices trended steadily downward in the second half of the week. The prompt-month (October) declined by 11% and hit a two-month low. Summer '23 was down by 10% or 77 cents. Winter ‘23/’24 was lower by 8.5% or 47 cents.

The selloff cannot be attributed to any one news item. As usual, revised weather forecasts were most relevant, but another large storage build contributed to the weakness. In longer-term news, permitting reform is being discussed in Washington as Democrats and Republicans outlined bills this week to ease the process of approving pipelines and energy-infrastructure projects. Senator Joe Manchin released his energy bill this week, mentioning his support of the long-awaited Mountain Valley Pipeline. The bill may face tough opposition from both Republicans and fellow Democrats. Following the release of Manchin’s bill, Republican senator Shelley Moore Capito unveiled her own plan for permitting reform, drawing support from 48 out of the 50 Republican senators.

Weather has cooled slightly throughout the week, with the forecast continuing to move lower into the shoulder season. As a result, natural gas-fired power generation demand should continue to trend lower as temperatures cool. However, in October, once HDDs begin to increase, we should begin to see residential and commercial demand increase. The October weather forecast looks slightly bearish, but things can change quickly. In the last three months, weather forecasts have started bearish but flipped to hot within the month. October is a month where a shift in weather directly affects starting gas inventories for the winter.  

Gas-production levels have apparently paused after stepping higher in the last two months. There were apparent production losses recently in both Appalachia and Haynesville, while the Permian Basin remained relatively flat from last week, PointLogic data shows. Still, higher production probably contributed to two bearish storage reports in a row. This week’s storage build came in on the more bearish side at 103 Bcf, bringing the total amount of gas in underground storage to 2,874 Bcf. This is the largest storage build of 2022 and the second build of the year that was larger than 100 Bcf.

Our hedging recommendations remain costless collars for most producer clients because of the extra value the options market provides for producer hedging. We are referring to the abnormal call skew in the natural gas market when saying “extra value.” However, this week’s large selloff requires us to point out that if the floor of a costless collar does not fit your budget or allow you to reach your internal goals, then perhaps a swap makes more sense. You don’t get to capitalize on the call skew, but you also have a higher guaranteed price (for those volumes you hedged) and more revenue secured, all else equal. In parts of the curve where call skew is more pronounced (usually winter tenors), you may still be able to get an attractive floor with a costless collar. Prices are still high relative to the historical average, and 2023 and 2024 prices have not declined as much as near-term prices. For consumers, the solution is more nuanced. Reach out to learn more.