Week Ending March 10

Oil takes a hit as U.S. rate hike fears counter China's recovery optimism

Oil posted a weekly decline. The April ’23 contract lost $3, or 3.8%, on the week to finish at $76.68/Bbl. Crude continues to trade range-bound this year as the concerns over further U.S. rate hikes compete with optimism around China’s recovery.

Fed Chair Powell reiterated on Tuesday that the central bank might raise interest rates faster than expected, but he added that a decision hadn’t been taken for the March meeting. Faster interest rate hikes can potentially decrease crude demand by making borrowing more expensive for businesses and individuals, reducing economic activity and discretionary spending.

Also, a strong U.S. dollar has been weighing on prices. The U.S. dollar normally trades inversely with oil, and after Powell's comments, the dollar has risen to a three-month high. However, it weakened on Friday from its recent highs.

Furthermore, China’s 5% GDP target for 2023, which is lower than economists' forecasts and weaker-than-expected import data, added further pressure on prices this week.

Despite U.S. macro headwinds, bulls can remain optimistic as there may be a swift rebound in China’s demand and supply risks from Russia.

AEGIS believes price risk is skewed to the upside in 2023 as the market faces supply shortfalls and upside demand risks. However, some analysts are revising demand estimates lower and forecasting a looser oil market in 2023. We do not ignore this possibility. Our favorite scenario, which is modestly bullish, is one where there is only moderate undersupply in 2023. Yet, there is still a problem with low inventories of oil and products as well as low OPEC spare capacity. This could provide slight scarcity and more leverage on price than it usually has. It makes the market vulnerable to upsets in the daily flow of oil supply.

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.

Gas gives up last week's gains to finish at a two-week low

Natural gas prices fully reversed last week’s 22% rally, with the prompt month NYMEX contract falling 58c to $2.43. The Summer ’23 strip fell by 50c to $2.86/MMBtu, and the Winter ‘23/’24 strip declined by 37c to $3.81/MMBtu. This week marked the sixth-consecutive week that prompt month prices traded in a range of $2-3/MMBtu.

Last week’s rally was predominately driven by expectations of a much cooler-than-normal March. However, weekend weather model runs removed 29 heating degree days leading to a significant repricing from Friday’s settlement. Weather forecasts throughout the week did not change materially from the weekend, keeping prices from rallying further. Although forecasts are not nearly as bullish for demand as last week, they continue to forecast temperatures below normal through the end of March.

While the prompt month contract has given back all of last week’s gains, the 2025 calendar strip has climbed 10c from last Friday’s settlement and 56c over the past two weeks to $4.23/MMBtu. This rally presents a good opportunity to implement a costless collar hedge structure. Based on planned LNG export projects, 2025 could be price inflationary.

AEGIS hedging recommendations continue to be swaps in the summer months and collars in the winter months. Utilizing collars in winter can benefit a producer for two reasons. With winter having more weather-driven demand than summer, a collar allows one to participate in potential upside, protect against lower prices, and take advantage of call skew (the relative expensiveness of calls to puts).