Week Ending May 5

Oil Posts a Third Consecutive Weekly Loss as Demand Uncertainty Lingers

Oil prices saw a significant decline this week but managed to rebound slightly on Friday, snapping a four-day losing streak. The June ’23 WTI contract lost $5.44 or 7% on the week to finish at $71.34/Bbl. Concerns about the economic outlook and its effect on demand have subdued the rally that started earlier this month after OPEC+'s surprise production cuts.

U.S. job openings dropped for the third consecutive month in March, and layoffs reached their highest level in over two years. However, better-than-expected U.S. payroll data on Friday helped ease some concerns about the looming economic downturn. The Federal Reserve raised interest rates by 25 basis points as anticipated and hinted at a potential pause in rate hikes.

Meanwhile, China's manufacturing PMI fell short of estimates, but seaborne crude oil shipments to the country reached a two-year high last month. Furthermore, air travel during China's Labor Day holiday exceeded pre-pandemic levels, offering a glimmer of hope for the oil market amidst broader demand concerns.

Uncertainty over Russia's commitment to a 0.5 MMBbl/d production cut till year-end has also weighed on crude prices. However, Russian Deputy PM Novak confirmed compliance, stating that increased tanker exports don't notably offset reduced pipeline shipments.

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 with a bullish bias.

Natural Gas Settles Near Multi-Month Low Ending Three-Week Rally

Natural gas prices finished the week lower by 27.3c to $2.137/MMBtu, erasing all of last week’s gains. Price is trading near the bottom of a multi-month range where it has been unable to move considerably higher or lower since February. Gas prices fell across the curve, with the Winter ‘23/’24 strip off by 14c to $3.442/MMBtu and the Summer ’24 strip down 12c at $3.263/MMBtu.

Consistent oversupply continues to plague the market, with production holding near all-time highs and weather-driven demand at a seasonally low level. Our calculation of the weather-adjusted supply and demand balance, which removes the effect of weather, continues to show the market averaging 2-Bcf/d oversupplied. This condition of oversupply has been present since the fall of 2022 and, apart from a few data points, has only shown a looser-than-normal market. With LNG feedgas volumes near total capacity, one of the only ways for the market to balance itself will be through increased gas burns in the power sector which requires low gas prices.

In the news this week, it was reported that the state of New York has passed a statewide law banning the installation of natural gas appliances in new construction. The law will take effect in 2026 for buildings shorter than seven stories and taller buildings in 2029. While the law exempts critical infrastructure, restaurants, and manufacturing facilities, it does not allow local or county governments to override it. Several cities across the US have instituted similar bans, although this is the first to be enacted on a statewide level.

AEGIS recommends hedging summer months using swaps and winter months using costless collars. A swap will provide more protection, while a collar will allow for participation in any potential upside. The reason for utilizing a costless collar in the winter months is due to elevated levels of call skew or the relative expensiveness of call options to put options, which allows for a higher floor price in the collar.