Week Ending July 14

Supply Disruptions and Weaker Dollar Propel Oil to a Third Consecutive Weekly Gain

The August ’23 WTI contract gained $1.56, or 2.1%, on the week to finish at $75.42/Bbl. A weak dollar and supply disruptions in Africa, along with falling Russian exports, supported prices this week as the market shrugged off the EIA's 5.9 MMBbl weekly build in U.S. crude stocks.

The U.S. dollar plummeted to a 15-month low on Thursday, making dollar-denominated commodities cheaper for holders of other currencies. Moderating inflation and the prospect of less aggressive Fed rate hikes have weakened the dollar, driving it lower in recent weeks.

Production disruptions in Libya and Nigeria have cut over 0.5 MMBbl/d of output, 0.5% of the global oil supply. Libya’s Sharara and El Feel fields shut down due to protests, while Nigeria’s Forcados oil terminal, which exports ~0.23 MMBbl/d, halted flows due to a leak. With no restart timeline, crude rallied nearly 70¢ following the Libyan news on Thursday.

Additionally, exports of Russian crude are starting to show signs of falling. Total oil exports dropped 0.6 MMBbl/d to 7.3 MMBbl/d in June, according to IEA.

The IEA lowered its oil demand growth forecast for 2023 by 0.22 MMBbl/d to 2.2 MMBbl/d, citing economic and rate hike headwinds. However, the agency forecasts record demand this year which could substantially drain inventories in H2. China alone is forecast to account for 70% of this demand growth.

OPEC+ cuts have started to kick in. WTI prompt spread recently flipped into backwardation for the first time since May, signaling a tighter market. With the cartel's extended reductions, our bullish outlook is predicated on the expectation of rising prices as supply-demand dynamics indicate a tight market due to significant inventory drawdowns.

AEGIS recommends costless collars for adding oil hedges, allowing for upside potential in line with our bullish outlook. However, given each portfolio’s unique needs and risks, we encourage you to consult your strategist to identify your most suitable strategies.

Mountain Valley Pipeline Faces a New Hurdle, and ERCOT Deals With More Record Loads

Natural gas prices fell for the second consecutive week, with the August NYMEX contract sliding 4.3c to $2.539/MMBtu this week and falling 26c over the past two weeks. Prices rallied on Monday and Tuesday before peaking around $2.75/MMBtu and then selling off for the rest of the week. 

While the recent debt ceiling legislation included language intended to push the Mountain Valley Pipeline towards completion, a new court order this week threatens the project again. Permits needed for the 2-Bcf/d Appalachian pipeline’s completion have been held up by the US Fourth Circuit Court of Appeals for several years. The debt ceiling bill took away the Fourth Circuit’s jurisdiction over the pipeline, giving it to federal courts. However, the Fourth Circuit court issued a stay order this week, preventing pipeline construction. Equitrans responded by citing the language of the bill and saying that it would evaluate all legal options, including an appeal to the US Supreme Court. In addition, the developer stated that the order will need to be reversed by July 26 for the pipeline to enter service in 2023. In what is likely a deliberate choice of date, the Fourth Circuit Court scheduled oral arguments on the matter for July 27. If the in-service date for the pipeline is pushed back, it would delay a 200-400-MMCf/d bearish impact on Henry Hub.

Turning to Power in the South Central region, and Texas in particular, power demand continues to break records. With temperatures in Texas rising above 100 °F again this week, demand on the ERCOT grid reached new all-time highs on Wednesday and Thursday. The total load peaked at 81.36 GW on Wednesday and 81.46 GW on Thursday. However, power and natural gas prices remained relatively subdued. Higher performance from wind assets cut into gas demand, with the net load, or total power demand after subtracting wind and solar generation, hovering around 58-62 GW this week. Natural gas demand in Texas averaged 7.10-Bcf/d this week, down from the 30-day average of 7.14-Bcf/d.

AEGIS continues to recommend hedging the winter months with costless collars and the summer months with swaps. Using costless collars in the winter can allow for a higher floor price on the collar due to higher levels of call skew or the relative expensiveness of calls to puts.