Week Ending May 12

Oil falls despite discussion of SPR buyback.

West Texas Intermediate extended losses on Friday as a stronger dollar and continued demand concerns pushed oil to below $70/Bbl. WTI settled on May 12 at $70.04, down about 15% since the OPEC+ cut induced an $83.26/Bbl high on April 12.

Earlier in the week, U.S. Energy Secretary Granholm said the government could start to refill the SPR after next month. The promise to refill the SPR has sparked little bullish interest as many analysts expect a refill effort to be slow and of small weekly volumes.

Citigroup, who has been mostly bearish on crude prices over the past few years, downgraded its Brent crude forecast from $84/Bbl to average around $82/Bbl this year with demand continuing to underperform expectations, Ed Morse wrote in a note. Note that their downgrade to $82/Bbl is still $8/Bbl above the current prompt Brent price of $74/Bbl. The bank cited a well-balanced market expected to last through year-end.

As WTI flirts with prices in the $60’s, we think the oil market is over-allocating nearby bearish factors like economic concerns, banking fears, and other bearish news items. In the face of all these concerns, AEGIS expects the market is waiting on proof of bullish factors to show up in the data. The largest of these is the OPEC+ cuts that are supposed to be taking effect this month and next. Our bullish thesis is centered on the belief that oil prices will climb once daily supply and demand signal a tight market due to supply cuts in the form of outsized inventory draws.

AEGIS recommends costless collars as the instrument of choice for adding oil hedges. Collars will allow for upside participation, given our bullish bias. However, every portfolio has different needs and risks, so please talk with your strategist about what structures work best for you.

Gas rallies on Friday, following the most significant rig count reduction in years

Natural gas prices posted a weekly gain in the June contract of 13c, from $2.137/MMBtu last Friday to $2.277/MMBtu today. Forward prices also advanced with the Winter ‘23/’24 strip higher by 12c from $3.416/MMBtu to $3.537/MMBtu.

The largest movement of the week occurred Friday following the release of the weekly Baker Hughes rig count, which showed gas-directed rigs down 16 from 157 to 141. The drop was split between numerous producing regions. The largest changes occurred in the Haynesville, which lost five rigs, the Marcellus, which lost three, and the Permian Basin, which also saw a decline of three rigs. This was the largest weekly drop in rigs since 2016 and is in line with language from public producers who have discussed cutting back on activity amid lower gas prices.

However, a drop in rigs will not necessarily equate to a drop in production (reported today at 100.3 Bcf/d). A reduction in completion activity is more closely related to changes in output. While dry gas production is down from the highs set last month at around 102.4 Bcf/d, this drop is primarily due to maintenance on several Appalachian pipelines.

Today’s rally in natural gas has led the Cal ’24 strip to advance by 7c from $3.41/MMBtu to $3.48/MMBtu. AEGIS recommends hedging Winter ‘23/’24 and Cal ’24 as we continue to hold a bearish outlook for these tenors. Cal ’25 has also been a point of focus as we believe many clients are underhedged in this tenor.