Week Ending January 13

Oil marks the longest streak of daily gains since February. How high can it go?

Oil rose for a seventh-straight session on Friday as inflation in the U.S. moderated last month, pushing the dollar lower, while Chinese oil consumption shows signs of increasing. Feb ’23 WTI gained $6.09, or 8.3%, this week to settle at $79.86/Bbl.

China made further progress toward reopening and increased crude import quotas for refiners, fostering optimism of a rebound in Chinese demand. However, there are concerns that lax COVID policies and an increase in domestic travel before the nation's Lunar New Year may result in a surge in infections.

Oil got an extended boost Thursday after U.S. data showed the annual inflation rate fell for the sixth consecutive month to 6.5% from 7.1%, its lowest level in more than a year. Further, analysts expect the easing inflation to allow the Federal Reserve to scale back on the pace of its rate hikes.

The EU's ban on Russian oil product exports is scheduled to take effect on Feb 5. Combined with the Dec 5 ban on seaborne Russian crude, many expect this to result in a supply loss of nearly 1.0-1.5 MMBbl/d.

AEGIS believes price risk is skewed to the upside in 2023 as the risk of supply shortfalls outweighs demand risks. Therefore, AEGIS hedging recommendations for crude oil remain costless collars for 2023 and 2024. A collar would set a price floor but allow for more upside participation, compared to a swap, if prices realize higher. The upside exposure afforded by the structure makes it very popular among our clients in bullish markets. However, if prices have shrunk close to your budget levels, let’s instead talk about a mix of swaps and collars that will give you the precise amount of protection you need.

Natural gas prices continued their multi-week slide, with the prompt-month NYMEX contract recording its fifth consecutive weekly loss. The selling was not limited to the front of the curve, with the Summer '23 and Winter ‘23/’24 seasonal strips also falling.

Withdrawals from storage are the norm during winter months, ESPECIALLY during January. However, for the week ending January 6, the EIA reported an 11-Bcf injection, the first ever during January. The injection also caused the deficit to the five-year average to contract (move toward a storage surplus) by 160 Bcf. How did this happen? Temperatures were the warmest in at least the last seventy years during that period. However, the EIA is expected to report a withdrawal next week, albeit a smaller-than-average one.

In other news, speculation of another Freeport LNG timeline delay surfaced again, but the company quickly refuted the rumors and reaffirmed its mid-January restart timeline.  Unnamed Reuters sources said that the Freeport LNG facility might extend its restart timeline into February. There were also reports that Freeport LNG canceled the loadings of at least two cargoes slated to arrive by the end of this month.

In other news, the Consumer Product Safety Commission is considering actions to limit indoor pollutants from gas appliances. A new study found that indoor gas appliances such as stoves could be responsible for emitting pollutants that can lead to asthma or respiratory issues. However, due to political backlash, the commission stated that a gas stove ban would most likely not be pursued; however, mandating warning labels or performance standards may be implemented.

AEGIS Hedging recommendations continue to be swaps for clients that desire certainty and protection, and collars for clients that may prefer to leave some risk on and potentially participate in higher prices. This choice may also depend on tenor and the amount of “call-skew”, or the relative expensiveness of call options to put options. Reach out to an AEGIS strategist for a more nuanced discussion on what works best for you.