Week Ending April 14

Oil Rises for Fourth Consecutive Week; IEA Warns of Larger Deficit From OPEC+ Cuts & Inflation Risks

Oil posted a fourth consecutive weekly gain. The May ’23 WTI contract gained $1.82 or 2.2% on the week to finish at $82.52/Bbl, driven by OPEC+’s surprise production cut, a moderate CPI print followed by a weak U.S. dollar.

The IEA, in its monthly report, warned that the surprise production cut by OPEC+ could drive up crude prices and worsen inflation. The group expects a larger oil deficit of 2 MMBbl/d by Q3, which non-OPEC producers may be unable or unwilling to fill, risking sharply higher prices. The bloc forecasts that non-OPEC+ countries will increase their output by 1 MMBbl/d, which could soften the impact of the cut. 

Oil futures hit their highest level since November on Wednesday after a smaller-than-expected increase was reported in the March CPI. A moderate CPI number potentially signals less acceleration in the Fed’s hiking cycle.

Additionally, the U.S. dollar also weakened to the lowest in a year after the CPI data, supporting dollar-denominated commodities.

Our expectation for a slight market deficit in 2H2023 relies on factors like robust demand from China, a reduction in Russian supply, and pricing in of economic concerns. The OPEC+ preemptive cut strengthens this view, but demand-side growth risks remain. It suggests a potentially bleaker outlook than previously forecast.

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 Rebounds to Finish 5% Higher This Week After The First Storage Build of 2023

Natural gas prices rallied 10.3c this week to settle at $2.114/MMBtu, reversing last week’s losses. Prompt month prices briefly traded below $2.00/MMBtu again this week but were never able to settle below that level. The Summer ’23 strip rose 4c to $2.467/MMBtu, and the Winter ‘23/’24 strip finished the week higher by 1c at $3.448/MMBtu.

This week marked the first storage injection of 2023, coming in at 25 Bcf. This build was 9 Bcf larger than the five-year average but also about 4 Bcf/d loose on a weather-adjusted basis, according to our calculations. This continues the trend of the market being oversupplied by about 2-2.5 Bcf/d, which has been the state of the market since late fall 2022. This data point is especially interesting because it is for a period in which the 2 Bcf/d Freeport LNG export plant was running at full capacity, and gas burns by the power sector were seasonally high relative to coal. Gas usage by the power sector is a factor that we will continue to monitor, especially going into summer. However, the share of the power stack occupied by natural gas is expected to remain high as long as there is an economic incentive to run more gas relative to coal.

AEGIS continues to recommend hedging the summer months using swaps and the winter months using costless collars. Swaps will provide more protection relative to collars. Still, with call options for winter months being more expensive relative to puts, a producer can extract additional value from a winter costless collar.