Week Ending May 26

Oil Notches Second Consecutive Weekly Gain; OPEC+ Sends Mixed Signals

The July ’23 WTI contract gained 84c or 1.2% on the week to finish at $72.46/Bbl. The market weighed mixed signals from OPEC+ regarding further cuts. Reports that the Biden Administration and House Republicans are nearing a deal to increase the debt ceiling for two years allayed some default fears.

Crude found support earlier this week after a warning from Saudi Arabia's Energy Minister, potentially hinting at more oil production cuts. However, Russia indicated that another OPEC+ supply cut is unlikely, leading to a pullback in oil's weekly gains. OPEC+ ministers are set to meet on June 4 in Vienna.

Despite Russia's pledge to cut oil production, there's scant proof they have done so. Bloomberg’s shipping data shows that Russian crude exports have increased since the agreed cuts, and although Russia claimed a redirection of barrels to support seaborne flows, pipeline flows had already decreased before these changes were enacted.

AEGIS believes the oil market is excessively focusing on nearby bearish factors, such as economic concerns and banking fears. Despite these concerns, AEGIS expects market participants to be waiting on proof of bullish factors to show up in the data. The largest among these is the OPEC+ cuts set to take effect this month and next. Our bullish view is founded on the notion that oil prices will rise once daily supply and demand dynamics indicate a tight market due to significant 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.

June '23 Gas Falls 40.4c to Two-Week Low As It Expires

Natural gas prices finished the week down 40.4c to $2.181/MMBtu, which was also the final settlement price for the June NYMEX contract. The Winter ‘23/’24 strip fell 14c to $3.504/MMBtu, and the Summer ’24 strip closed 6c lower at $3.30/MMBtu.

While temperatures have not yet increased enough to substantially boost power sector gas burns, gas occupied a record level of the thermal stack this week at 75%. This is a result of low gas prices incentivizing higher gas usage relative to coal. Low levels of wind generation across the US have also helped power burns. Wind generation directly competes with natural gas in the power mix, and with wind generation levels reaching a three-year low this week (despite installed wind capacity at an all-time high), the power sector must run gas generators at a higher level.

These dynamics may be showing up in the EIA’s weekly natural gas storage report. The agency reported this week that gas inventories increased by 96 Bcf, which was at the lower end of analysts’ expectations for a second week. After adjusting for the weather, our supply and demand balance calculation also showed an undersupplied market for the second consecutive week. As power demand ramps over the next few weeks, it may provide more insight into how market dynamics will play out this summer.

AEGIS recommends hedging the summer months using swaps and the winter months using costless collars, given that winter month contracts have higher levels of call skew than summer months. This skew allows for a higher floor price on a costless collar.