Week Ending January 20

Oil holds gains on hopes of China’s reopening. Will the rebound last?

Oil posted a modest gain this week. Feb ’23 WTI gained $1.45 to expire at $81.31/Bbl. It was a build-on larger price increase last week. The market remains optimistic about a recovery in Chinese demand as the country lifts Covid restrictions ahead of the country’s Lunar New Year travel season.

China’s New Year celebrations begin on January 22, and the Chinese government anticipates 2.1 billion person trips over a 40-day period. Many analysts have already incorporated China's reopening in their forecasts, but how quickly it happens and how the government handles the potential concurrent Covid surge will be key.

Closer to home and more immediately, the EIA reported an SPR crude balance of 371.6 MMBbl for the week ending January 13. The 220-MMBbl draw from the emergency oil reserve since November 2021 has finally concluded. The SPR now stands at 371.6 MMBbls, its lowest since 1983. However, the Biden administration is negotiating purchases to refill the reserve at a $70/Bbl oil price.

U.S. oil demand may slip soon. U.S. oil refiners are planning twice as many “turnarounds” (planned maintenance) this spring as they typically do to compensate for maintenance put off by the pandemic and the appeal of record-high margins, according to IIR Energy. As a result, by mid-February, U.S. refiners will lose about 1.4 MMBbl/d of processing capacity. At least 15 American oil refineries have scheduled maintenance lasting two to eleven weeks.

The extent of the scheduled outages indicates that gasoline and diesel supplies may tighten, and refining margins may increase. This also coincides with the EU’s ban on Russian petroleum products going into effect on February 5 and increasing worldwide demand for U.S. fuels.

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.

Prompt month natural gas recorded its sixth consecutive lower weekly close this week, falling as low as $3.11/MMBtu. Meanwhile, the Summer '23 strip is at its lowest price since January of last year, and the Winter ‘23/'24 strip is at its lowest price in more than nine months.

The supply-and-demand woes of 2022's fourth quarter have continued into 2023. Storage withdrawals continue to be smaller than average, production is near records, and the restart timeline for the 2-Bcf/d Freeport LNG facility is still unknown. These factors have consistently pressured gas prices lower. Historically, the first half of January usually has the largest storage withdrawals of the year; however, only 82 Bcf was withdrawn compared to the five-year average withdrawal of -187 Bcf.

The idle Freeport LNG export terminal began to receive very small feedgas volumes this week. However, that does not imply a restart is coming any sooner. PointLogic data shows about 50 MMcf/d of gas flowed into the facility starting last weekend, but this gas was not for liquefaction. Instead, according to Reuters, the facility was performing maintenance on its flare stack, similar to what happened last month. As of January 20, Freeport's flows have returned to zero.

Kinder Morgan announced this week that repairs to the El Paso Natural Gas pipeline Line 2000 should be complete by the end of the month. A rupture in August 2021 has kept the section of the pipeline offline since then. As the El Paso Natural Gas pipeline supplies the West with gas from the Permian Basin, the return of Line 2000 to full service should increase the takeaway capacity from the Permian by as much as 0.5 Bcf/d and allow more supply to enter the southern California market.

AEGIS recommends hedging with swaps or collars, depending on the client's risk tolerance. For those who want to participate in potential upside, costless collars could provide a benefit. However, while a collar will keep upside exposure, a swap will give the highest level of protection.