Week Ending June 2

Oil Posts a Modest Weekly Loss; OPEC+ Meeting Approaches Amid Saudi Speculator Warning

The July ’23 WTI contract lost 93c or 1% on the week to finish at $71.74/Bbl. This comes after May's sharp decline amid economic concerns and fears of a U.S. government default. However, the default fears eased after the Senate passed legislation to raise the debt ceiling, now pending President Biden's signature.

Attention is now on the upcoming OPEC+ meeting. Market participants are assessing the likelihood of further production cuts following April’s 1.6 MMBbl/d off-cycle reduction. Despite Saudi Arabia's energy minister warning speculators, an unchanged output decision is expected from the weekend’s meeting.

The U.S. dollar spiked to its highest level since February this week, weighing on crude prices. However, the dollar weakened on Thursday.

China's manufacturing sector showed signs of a post-Covid recovery slowdown in May, despite conflicting reports from an S&P Global survey, casting doubts about the country's economic trajectory.

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. 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.

Mountain Valley Pipeline Provision Included in Latest Debt Ceiling Bill

Natural gas prices moved lower for a second week, with the prompt month (July) contract falling 24.3c from $2.417/MMBtu to $2.172/MMBtu. In total, gas has lost nearly 50c over the past two weeks. Large price moves occurred across the curve, with the Cal ’24 strip falling 11c to $3.413/MMBtu amid news that the Mountain Valley Pipeline has been included in the US debt ceiling bill.

After a lengthy five-year delay, the Mountain Valley Pipeline may finally have received the push needed to complete the project. The bill to raise the US debt ceiling and avoid a fiscal crisis also includes a provision to expedite the pipeline’s completion. There have been several prior attempts by Senator Joe Manchin to include language necessitating the pipeline’s completion, but all of them were ultimately removed from the bills. It appears that MVP will finally be included in the final version this time. The section of the bill on MVP states that the Secretary of the Army shall issue all permits and necessary verifications for the completion of the pipeline.

The 2-Bcf/d pipeline was originally slated to be in service in 2018, with the intention of shipping gas from the Appalachian basin to demand centers in the Mid-Atlantic region. MVP would open egress out of the constrained Appalachian basin and allow another 2-Bcf/d of production from the country’s largest gas-producing region. Depending on when the pipeline is completed, this could make 2024 more oversupplied than expected and 2025 less undersupplied than expected.

AEGIS recommends hedging winter seasons using costless collars and summer seasons with swaps. Given the developments relating to MVP, we suggest adding hedging in 2024 specifically.; added Appalachian gas also causes 2025 to be less bullish.