Week Ending March 31

Oil Surges to a Three-Week High Amidst Supply Concerns and Stronger Demand Expectations

Oil posted a second consecutive weekly gain. The May ’23 WTI contract gained $6.41 or 9% on the week to finish at $75.67/Bbl, driven by supply disruptions in Northern Iraq and the receding fears of a banking crisis.

Signs of tightening supply aided prices as Kurdistan's oil exports remain halted, and production is being shut down due to limited storage capacity. Exports of nearly 0.4 MMBbl/d from the semi-autonomous Kurdistan (Northern Iraq) to the Turkish port of Ceyhan were halted following a court ruling last Saturday that Iraq has sole control of the Iraq-Turkey pipeline. Kurdistan officials are to meet in Baghdad next week for talks on restarting exports.

Additionally, the U.S. Dollar weakened relative to its recent highs this week, making oil cheaper for holders of other currencies.

Furthermore, concerns about the banking crisis in the U.S. and Europe have eased, allowing oil to recover from 15-month lows. Also, China's overall business activity surged at its fastest pace in 15 years, indicating a post-COVID economic recovery, albeit at an uneven pace. The market expects this recovery to boost crude demand to record levels this year.

However, the supply side remains muted as a smaller-than-expected decrease in Russian crude exports may act less bullish in the near term, keeping prices more neutral in 2023, but more supply shortfalls would be a bullish factor not yet priced in.

On balance, 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.

Natural Gas Prices Continue Downward Trend for the Fourth Consecutive Week, as Trading Activity Hits Record Highs on ICE North American Gas Products

Natural gas prices fell again for the fourth consecutive week. The April contract rolled off, settling at $1.991/MMBtu and making May the prompt-month contract. The May contract fell 14.5c to settle at $2.216/MMBtu for the week.

As prices have declined in 2023, liquidity in North American gas markets has jumped, according to Intercontinental Exchange. The trading exchange reported this week that many products and trading hubs have not only seen increased year-over-year volume and open interest but that liquidity has reached record levels. Total open interest across all of ICE’s North American gas products reached a record high of 17.45 million contracts, with volumes up 15% year-over-year. Of the 64 gas trading hubs listed on ICE, the most significant activity increase came from CIG Rockies Basis, where volume is up 243%, REX Zone 3 with a 128% gain, and Houston Ship Channel at 85% over last year. The company attributed the increase in activity to high demand from hedgers who have stepped into the market to protect against a potential further slide in gas prices.

On the infrastructure side, the long-delayed Mountain Valley Pipeline may finally be on track to completion after a ruling by a US federal court. The 2-Bcf/d Appalachian pipeline has been more than 90% complete for over a year, but construction has been halted due to lawsuits regarding the pipeline’s water-crossing permits. One of these lawsuits was struck down this week by the US Fourth Circuit Court of Appeals, leaving only one case in the path of MVP’s completion. If the final lawsuit is struck down, the only steps needed to finalize construction will be the re-issuance of FERCs’ and the US Forest Services’ biological opinions. However, if the second lawsuit proves to be a more significant issue than the first, potential permitting reform from congress could push the project to completion.

AEGIS recommends hedging the summer seasons with swaps and the winter months with costless collars. Using a costless collar, a producer can capture excess value from call-skew or the relative expensiveness of call options to put options. This also opens up interesting adjustment opportunities at later dates, such as suggestions we have brought to clients recently involving rolling down high-priced calls to capture realized gains from the hedge position.