Week Ending August 4

Extended Cuts from Saudi and Russia Drive Oil to Multi-Month Highs

Oil futures posted a sixth straight weekly gain. September ’23 WTI contract gained $2.24, or 2.6%, on the week to finish at $82.82/Bbl.

Crude prices bounced back following a 2% decline on Wednesday, which was spurred by Fitch Ratings' decision to lower the U.S. credit rating from AAA to AA+. This rebound was in response to Saudi Arabia's Thursday announcement that it would prolong its production cut of 1 MMBbl/d through September. The kingdom also hinted that its cut could be "extended or extended and deepened" if it deems it necessary.

Shortly after, Russia announced that it was extending its export curbs through September, though it tapered the curbs from 0.5 MMBbl/d in August to 0.3 MMBbl/d. Moscow has previously pledged to cut production by 0.5 MMBbl/d from March through 2024.

Supply cuts by OPEC have led to a near $12/Bbl increase in both crude benchmarks since the start of July, as the cartel's quota-bound output dropped from 28.69 MMBbl/d in June to 27.79 MMBbl/d in July.

Also, China’s commitment to additional stimulus measures provided some optimism for the demand outlook. Analysts at Goldman Sachs expect strong demand to push the market into a deficit of 1.8 MMBbl/d in 2H 2023, mostly on the back of China’s recovery.

The Biden administration has postponed refilling the SPR, citing prevailing market conditions and higher oil prices. DOE has bought back 6.3 MMBbl in recent months and emphasized its commitment to refilling the SPR, maintaining its purchase stance ($67-$72/Bbl) when beneficial to taxpayers.

Furthermore, EIA data showed a record 17 MMBbl draw in crude inventories last week, providing further evidence of a tightening market. Inventories at Cushing have dropped by 8.4 MMBbl/d over the past four weeks, pushing stock levels to their lowest since early May and supporting the widening backwardation of front-month WTI.

With the cartel's extended cuts, 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. Given each portfolio’s unique needs and risks, we encourage you to consult your strategist to identify your most suitable strategies.

Haynesville DUCs Could Be Overstated

As earnings season progresses, several large public producers have commented on the current state of the gas market and where they think it could be heading from here. The common sentiment is mostly the same as what producers have been guiding for this year, keeping production steady and cutting back on drilling activity.

However, one interesting note from the Chesapeake Energy call related to the number of DUCs, or drilled but uncompleted wells, in the Haynesville region. The EIA estimates more than 700 DUCs are in the region, but Chesapeake believes that number is highly inflated. The company attributed the high EIA numbers to DUCs in non-core zones being included, abandoned wells that may never be completed, and changes to the way frac crews are working pads. Their estimate for the total number of DUCs in Haynesville is closer to 150-200 rather than 700.

AEGIS recommends hedging summer months with swaps and winter months with costless collars. Call options for winter month contracts exhibit higher levels of skew, or expensiveness relative to put options, providing producers with a higher floor price on the collar.