Week Ending September 22

Oil Hovers at Yearly Highs as Russia Puts the Squeeze on Tight Market

Oil had a fluctuating week, with the November ’23 WTI contract gaining a modest 1c, or 0.01%, on the week to finish at $90.03/Bbl. While Russia’s temporary ban on fuel exports tightened an already stressed fuels market, indications that the US Fed will keep interest rates higher for longer have possibly tempered oil’s rally.

Russia, the largest seaborne diesel-type fuel exporter, has halted diesel and gasoline exports from Sept 21 with no clear end date to control rising domestic fuel prices. The nation’s oil processing dropped to its lowest since May at 5.28 MMBbl/d last week as seasonal maintenance entered its peak. The market anticipates the ban to continue for weeks until Russia replenishes its inventories and can start capitalizing on high crack spreads.

Additionally, within the CFTC's managed money category, both net-long and long-only positions for NYMEX WTI oil have hit their highest in 19 months. The willingness of speculators, CTAs, and funds underscores the rally's momentum. For most of 2023, we highlighted reduced net-long positions by speculators, who seemed to wait for a bullish market shift, which is now playing out.

From a macro perspective, the focus returned to the US Fed holding interest rates but hinting at a potential hike by year-end. An increase could potentially dampen the economic growth, translating to a subdued fuel demand. In line with this, the US dollar reached a six-month high, making dollar-denominated commodities more expensive.

However, oil prices have risen by nearly $20 this quarter on the back of the extended 1.3 MMBbl/d output cuts by Saudi Arabia and Russia. Additionally, the demand outlook is improving as Chinese refiners, the world's largest oil importers, ramped up processing to an all-time high of 15.3 MMBbl/d in August. Based on the outlook, banks like Goldman Sachs, Citi, and BofA forecasted a return of $100 oil before the year-end.

The crude market has several moving parts, and considering Saudi Arabia’s significant role in buoying the market, tightening physical market, and low inventories, AEGIS recommends hedging WTI using swaps, given the rally in the WTI curve in recent months and the rising put skew. In the past, we favored hedging with costless collars, which allowed a bullish outlook to unfold.

Cove Point Begins Maintenance as NGPL Hits Pause Button

Natural gas prices were mostly unchanged this week, settling lower by 2c to $2.63/MMbtu. The Winter ‘23/’24 strip fell 5c to $3.27/MMbtu, continuing the trend of weaker prices in the nearby winter and summer strips. The Summer ’24 strip lost 1c to settle at $3.16/MMbtu.

Total gas demand fell by 1.53 Bcf/d this week, with the change split between power sector demand and LNG feedgas. While the drop in power sector demand is due to milder temperatures, the LNG drop is due to reduced feedgas volumes at Cove Point LNG from 0.9 Bcf/d to zero, as the facility undergoes a month-long maintenance event every year around September-October. Cove Point is one of the two smallest LNG export plants but still represents a decent amount of demand for the Mid-Atlantic region, and its maintenance will often lead to spot and prompt month weakness in Northeast basis prices.

In the Gulf Coast, an anticipated maintenance event on the Natural Gas Pipeline of America (NGPL) was postponed. The event would have reduced supply flowing from Texas to Louisiana by 400 MMcf/d from 1.2 Bcf/d to 0.8 Bcf/d and would have lasted from October to December. An updated date for the maintenance has not been released, only that it will occur sometime between March and August 2024. The primary impacts of this will be less supply flowing to Henry Hub and potentially to the Sabine Pass LNG export facility, which receives gas from NGPL.  Interestingly, on Thursday afternoon, NGPL declared force majeure on the same section of the pipe (east of compressor station 302) and reduced capacity by 200 MMcf/d. Deliveries will be affected until further notice.

AEGIS recommends hedging the winter months with costless collars and the summer months with swaps. Costless collars benefit from higher levels of call skew or the relative expensiveness of call options to put options and can allow for a higher hedge floor. Currently, call skew is elevated relative to normal levels for both Winter ’23/’24 and Winter ‘24/’25.