Week Ending April 21

Oil Snaps Four-Week Rally as Demand Fears Counter OPEC+ Cuts

Oil prices fell sharply this week, snapping a four-week rally. The June ’23 WTI contract lost $4.65 or 5.6% on the week to finish at $77.87/Bbl. Crude prices gave up most of their OPEC-driven gains amid renewed demand concerns.

Economic uncertainty dominated the oil market this week, despite strong underlying fundamentals. The market may not be pricing in the OPEC-driven supply deficit yet, as the output cuts are not expected to have a significant impact until after May. Our outlook is still skewed to bullish as once the output cuts are implemented; inventories may start to decline.

Nevertheless, demand uncertainty persists as concerns about an economic slowdown and further interest rate hikes weigh on crude prices despite positive economic data out of China. The near-term outlook may likely be sluggish as the market weighs the risks of a global economic slowdown against the tight supply situation.

A stronger dollar also weighed on crude prices this week, making oil more expensive for holders of other currencies.

Additionally, the U.S. is considering refilling its Strategic Petroleum Reserve (SPR) in the fall of 2023. The decision will depend on oil prices and the administration's ability to manage the mandated sale of 26 MMBbl by June 30.

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 but is staying with a bullish outlook. 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.

Gas Posts a Second Straight Weekly Gain as Cooler April Forecast Improves Demand Outlook

Natural gas prices rose 11.9c this week from $2.114/MMBtu last Friday to $2.233/MMBtu today. This was the second consecutive weekly gain in the NYMEX prompt month contract. The Summer ’23 strip settled 9c higher at $2.556 while the Winter ‘23/’24 strip rose 14c to $3.594. The week started off strong, with weekend weather model runs adding a decent amount of demand in the form of a late-season cold front.

In the news, it was reported this week that FERC has reissued the approval letters for both Rio Grande LNG and Texas LNG. The two export plants are planned for the Port of Brownsville in south Texas and will have a combined capacity of nearly 4-Bcf/d, with 3.6-Bcf/d coming from Rio Grande. After opposition from climate advocacy groups, the regulatory commission was forced to reevaluate the facilities’ environmental permits but found that the facilities would not create any environmental concerns. These two projects represent a relatively small percentage of the total amount of LNG feed gas demand that will materialize over the next decade.

One of the key producing areas that will supply the feed gas for these facilities will be the Permian Basin, although additional pipelines will be needed. It was announced this week that one of the planned pipeline expansions to be completed this year would be delayed.  Kinder Morgan’s Permian Highway pipeline, originally expected to be in service in November 2023, will be delayed to December. This was announced during Kinder Morgan’s Wednesday earnings call, with the company citing supply chain constraints as the issue. This led to a surge in trading activity in both Waha and Houston Ship Channel basis markets.

AEGIS continues to recommend hedging the summer months with swaps and winter months with costless collars. There is more premium priced into the winter month’s options, which enables producers to extract additional value in the form of a higher floor price from using a winter costless collar.