Week Ending April 28

Oil Posts a Second Consecutive Weekly Loss Despite OPEC+ Production Cuts

Oil prices saw a sharp decline earlier this week but managed to rebound on Friday, snapping a five-month losing streak. The June ’23 WTI contract lost $1.09 or 1.4% on the week to finish at $76.78/Bbl. Concerns about the economic outlook and its impact on demand have dampened the rally that began earlier this month following OPEC+’s surprise production cuts.

This week, the oil market was mainly influenced by concerns about the economic outlook. The market might not yet account for the supply deficit caused by OPEC+'s output cuts, as their significant effects are anticipated after May. Despite this, our outlook remains bullish, as implementing these cuts may lead to a decline in inventories.

However, demand uncertainty lingers due to worries about a potential economic slowdown and additional interest rate hikes, even with positive economic data from China.

The market is keeping a close eye on next week's Fed meeting, where another rate hike is widely anticipated. Additionally, the market is tracking China's Labor Day holiday to determine if it indicates a robust economic recovery.

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 Third Straight Weekly Gain, But Oversupply Looms

Natural gas prices ended higher on the week, but only due to the contract roll from May to June. The now prompt June contract finished the week at $2.41, up 19.4c on the week.  

U.S. supply looks to end the week near record levels, as modeled dry gas production was about 101.55 Bcf/d on Friday. The higher level of production comes amid a dip in LNG feedgas demand. While Freeport LNG is setting new consumption records, Cameron LNG inputs fell this week, bringing U.S. liquefaction down to 13.5 Bcf/d. AEGIS has estimated that the gas market has been oversupplied by at least 2 Bcf/d on average this year. With new gas demand growth lacking for the next 12-18 months, we estimate that the market remains in oversupply through the end of 2024 unless supply were to abate.

Gas prices were jolted higher in early Friday morning trading as a lightning strike hit the Columbia Gulf (CGT) pipeline infrastructure. CGT delivers over 2 Bcf/d of gas from Appalachia to the Henry Hub area. Near 7 AM CST, the June contract quickly rose from $2.29/MMBtu to $2.52/MMBtu on the news that CGT had declared force majeure. The outage at the Corinth compressor on CGT in Mississippi will back up gas into Appalachia and reduce the amount of gas headed to the demand centers in Louisiana. As of Friday, it looked like only 400,000 Dth/d would be impacted, and therefore, most of the initial price reaction pared back.

AEGIS recommends swaps in the summer and collars in the winter months for most clients. We remain bearish through the Summer 2024 strip but see upside potential from Cal 2025 through Cal 2027.