Week Ending September 30

Oil has now posted its first quarterly loss in two years. Since the end of June, WTI lost nearly 25%, or $26.27, to finish at $79.49/Bbl today, the last day of 3Q. Concerns persist over a potential recession and a slowdown in demand. Oil futures have also been pressured by a strong U.S. Dollar.

The USD Index (DXY; a proxy for the U.S. dollar value against a basket of other international currencies) reached a new 20-year high this week. The rally in DXY was one of the major bearish factors affecting crude prices. A more expensive dollar can cause foreign buyers of dollar-denominated commodities to pay more for the same amount of goods; therefore, it looks cheaper in dollar terms. The DXY  rally paused late in the week, but the ongoing strength is likely holding back oil prices.

On the supply side, several members of OPEC+ have discussed another potential production cut to be considered at the regular monthly OPEC+ meeting on October 5. The extent of the potential production cut is still unclear, although earlier this week, Russia expressed support for a 1 MMBbl/d cut. This morning, Reuters reported that some producers had narrowed the range of options to between 0.5 and  1.0 MMBbl/d. Additionally, Saudi Arabia's Energy Minister Salman urged the group to continue being "preemptive and pro-active" regarding energy markets.

AEGIS notes that even if the quota target is reduced, the actual production loss may be much smaller, given that many OPEC+ countries are already pumping well below their targets. Furthermore, a significant fall in the collective quota would indicate to the market that the cartel is actively monitoring price changes and would act accordingly.

Despite the recent price weakness, we are bullish on crude oil prices versus the forward curve’s current value. We believe that most of the identifiable bearish factors are “priced in,” and the price risk is now skewed to the upside. But there are many moving parts, any of which could surprise us: potential OPEC output cuts, an uncertain global economy, looming Russian sanctions, and the end of SPR releases (refill starting in FY 2023).

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

The November contract closed lower this week by 19 cents, marking the fifth consecutive weekly loss for prompt-month Henry Hub. The Summer ’23 strip finished lower by 14 cents, and the Winter ‘23/’24 strip closed 19 cents lower.

The November contract, which became the prompt month this week, is the first month of the gas winter “strip,” so the market is now more focused on winter supply. While the storage levels going into winter are not especially low by historical standards, they are 306 Bcf below the five-year average. Such a deficit could leave the market open to fears of scarcity if winter weather is colder than expected. There might be a storage deficit, but this week's 103-Bcf injection was the second consecutive triple-digit build and third of the year. The large builds have shrunk the deficit, but with a little over a month left in the injection season, below-average storage to start winter is near certain.

Production could contribute to higher-than-average builds if it continues to grow. While last week's production fell from yearly highs to an average of 99.3 Bcf/d, this week's production has risen slightly, according to data provided by PointLogic.

In the news, reports of a leak in the Nord Stream pipeline in Europe quickly became reports of sabotage. Initially, it was unknown what caused the leak and loss of pipeline pressure; Later, seismologists in the area reported underwater explosions that occurred just before the leak was reported. Both Nord Stream 1 and the non-operational Nord Stream 2 pipelines were targeted. It is currently unclear who is behind the action. Such an outage makes U.S. LNG exports much more important to Europe and the globe.

In the U.S., Hurricane Ian made landfall in Florida, with a 16-foot storm surge and damaging winds. A significant amount of power transmission infrastructure was knocked offline, leaving about 20% of Florida power customers without electricity. PointLogic data shows gas-fired power generation declined by 1.5 Bcf or 60%. Florida Power and Light said that much of their system would have to be rebuilt instead of repaired, potentially leaving some of the states without power for longer. Until the infrastructure is repaired, natural gas demand will likely be suppressed.

AEGIS hedging recommendations remain costless collars for most clients because of call skew rather than our price outlook. The forecasted starting inventory levels for this winter have increased and now sit at 3.47 Tcf, by our estimates, much higher (and more bearish) than our 3.35 Tcf forecast a couple of months ago. While starting inventories will be lower than normal, winter prices may be giving too much credence to the probability of a supply-scarcity event. Weather is still king and will ultimately determine where prices and this market goes. But we think prices could just as easily slip much lower as much higher.

Beyond this winter, we hold a more cautious outlook. If supply grows faster than demand, as we expect, then 2023-2024 may be persistently oversupplied, and prices may sag. Producers, consider whether 2023 and 2024 prices are beneficial to your budget goals and whether a disappointing winter could put prices lower and your goals out of reach. Hedging can often remove that uncertainty.