Week Ending March 17

Oil Dives to 15-Month low as Banking Turmoil and Rate Hike Fears Trump Fundamentals

Oil posted the biggest weekly decline this year. The April ’23 contract lost $9.94, or 13%, on the week to finish at $66.74/Bbl. Crude snapped its range-bound trading this week as the fallout from the banking crisis stoked recession fears.

The failure of Silicon Valley Bank (SVB) and trouble at Credit Suisse, compounded by technical selling, triggered a three-day rout earlier this week that sent prices to the lowest since December 2021.  

The sell-off appeared to have halted on Thursday after some banks received cash deposits from bigger banks. OPEC officials on Thursday said that the bloc will wait till the financial markets calm before deciding whether to take any action.  On Friday morning, however, prices headed lower once again.

Both IEA and OPEC+, in their monthly reports, expect global oil demand to exceed supply in late 2023 but forecast a surplus in the near term, citing seasonal demand lulls and higher-than-anticipated Russian production.

However, Russia's oil exports are facing challenges due to a struggling logistics network that is struggling to keep up with Russia’s daily exports of over 7 MMBbl of crude and products. Ships carrying fuel are floating off the coasts of Africa, and Latin America, while oil tankers are bouncing between Chinese ports. The increasing waiting time for cargo to find homes may lead to lower exports and production in the future.  

AEGIS believes that price risk is skewed to the upside in 2023 due to supply shortfalls and upside demand risks. AEGIS acknowledges that global economic concerns are real and advises a modestly bullish scenario where there is only moderate undersupply but low inventories of oil and products. Furthermore, low OPEC spare capacity could lead to slight scarcity and more leverage on price than usual. This vulnerability makes the market susceptible 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.

U.S. Natural Gas Inventories Near Multi-Year High

Natural gas prices settled lower for the second consecutive week, down 9.2c to $2.338/MMbtu. Prices further out on the curve fell more, with the Summer ’23 strip declining by 14c to $2.730/MMbtu and the Winter ‘23/’24 strip finishing the week down 18c to $3.623/MMbtu. This decline in price was despite this week being the coldest since early February, boosting demand for space heating and bringing residential/commercial demand 7 Bcf/d above the average for the week. This should lead to a robust draw on storage in next week’s EIA report; however, it will not be enough to materially affect the 378 Bcf storage surplus.

While total Lower 48 gas storage is near the top of the five-year range, the South Central region has far exceeded that level. South Central salt and non-salt inventories are both about 32% above the five-year average, the largest surplus of any region. The only regions that do not have a storage surplus are the West and the Rockies, which have experienced significantly cooler weather than the US, as well as volatile gas basis prices.

With only a few weeks of storage withdrawals left and inventories near a multi-year high, there is a risk of storage ending the injection season near 4.2 Tcf. Our calculations show an end-of-season estimate in excess of that level assuming normal weather. Although, there are some market dynamics that should regulate inventories to a more reasonable level. Our view is that, for storage to end the injection season (Nov ’23) closer to the five-year average, more demand will have to be picked up from the power sector in the form of coal-to-gas switching. For that scenario to play out gas prices will likely have to remain low for an extended period. While we have seen some evidence that coal-to-gas switching is occurring, it has not led to a large enough demand boost to tighten the market.

AEGIS continues to recommend using swaps in the summer months and costless collars in the winter. Our view is that the first half of 2024 may be looser than 2023 and that it may be more prudent to use swaps for those months. The second half of 2024 should see a boost in LNG export demand, creating a scenario where more upside may be found in the market, potentially making collars more attractive.