Week Ending February 03

EU-G7's price cap on Russian crude didn't disrupt any flows. Will the ban on fuels affect the refined product (and oil) market?

Oil posted a second consecutive weekly loss. March ’23 WTI lost $6.29 to finish at $73.39/Bbl. Friday’s decline of -$2.49/Bbl reinforced the market pessimism. Crude prices have continued to weaken despite expectations of a recovery in Chinese demand. Supply concerns have resurfaced with the EU’s looming ban on Russian refined products and its oil-price cap slated to take effect February 5.

EU and G7 nations have announced a $100/Bbl cap on premium Russian refined products like diesel and a $45/Bbl cap on cheaper products (i.e., fuel oil), though discussions are still ongoing. Russian diesel is still priced ($115-120/Bbl) above the G7’s proposed price cap level. While the ban on crude has apparently not impacted Russia’s seaborne crude exports because oil has traded below the price cap, the fuel ban might tighten supplies if buyers refuse to purchase at current levels that exceed the price cap. However, Russia’s resilience against Western sanctions might pan out as a less bullish component in 2023 if there aren’t anticipated levels of supply loss.

OPEC+ reaffirmed its commitment to current production arrangements amid uncertainties about demand in China and the impact of sanctions on Russian crude supplies. OPEC+ delegates reiterated their plan to maintain a cautious stance until there are more definitive signals that the market requires higher crude supplies.

The U.S. Fed announced Wednesday yet another, but smaller, rate hike, at 25 basis points, largely in line with expectations, and indicated more hikes could follow.

AEGIS believes price risk is skewed to the upside in 2023 as the risk of supply shortfalls outweighs demand risks. We do note that demand forecasts by many analysts have decreased in recent months, making the chance of a tight market less acute. 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 posted another weekly loss, declining by 44c this week for a total rout of 63c over the last two weeks. With prices trading near $2.35/MMBtu, gas is at its lowest level in more than 21 months. However, many regional basis prices have remained firm despite collapsing prices at Henry Hub, leading to tighter basis spreads. Also, Freeport LNG is receiving its highest feedgas levels since the facility went offline last June.

Gas basis prices at Houston Ship Channel, Waha, and Dominion South are at their strongest levels in months. For example, the Summer ’23 Waha basis price climbed above $-1.50/MMBtu this week, nearly half its 2022 low of $-3.62/MMBtu set in November. Eastern Gas (formerly Dominion) South is experiencing a similar rally, with the Summer ’23 strip trading around $-0.71/MMBtu, up from $-1.55/MMBtu in June 2022. These narrowing basis prices could provide a good opportunity to hedge certain regional basis exposure, especially as limited takeaway capacity in 2023 could lead to wider basis spreads in particular regions.

One of the largest sources of demand expected to impact the gas market this year will be the return of the 2.1-Bcf/d Freeport LNG export facility. This week, Freeport submitted multiple requests to federal regulators to begin a few steps necessary to restart commercial operations. In addition, Freeport feedgas demand reached 120 MMcf/d, its highest since June.

AEGIS Hedging recommendations remain swaps in the summer and collars in the winter because of call skew. With prices down significantly from year-ago levels, many clients may find the added protection of swaps preferable. If you are unsure how much you should be hedging at these price levels, reach out to your AEGIS strategist to discuss.