The oil market has rallied across two key price levels in Cal 24 ($80.00) and Cal 25 ($75.00). Since October 5, Cal 24 has nearly regained all of its losses suffered in the first week of October. Outside of the surge in prices during the month of September, current levels are the highest since June 2022. The same is true for Cal 25 with the recent recovery within 50¢ of the yearly high set on September 14.

As we noted early last week, our preference on hedging structure for Cal 24 is swaps (fit to the curve) in order to help fight backwardation and help manage internal cash flows. If swaps do not fit your internal needs, less put skew in 1H24 make collars more attractive. If you have questions or would like to discuss specifics, please reach out to your trader.

10/9/2023: WTI Cal 24 Hedging Options and Recommendation

Market: NYM WTI CMA

Hedge: Cal 24 NYM WTI CMA Swap - $77.52

AEIGS recommends adding hedges in Cal 24 to mitigate some price risk as we begin to approach levels seen before the large sell-off last week. The news of the Hamas attack has lifted the pricing of oil and allowed producers another opportunity to protect potentially profitable pricing. We are recommending adding swaps and fitting those swaps to the curve to help fight backwardation and help manage internal cash flows, especially when financial payment terms are set to match physical sale. We understand that some of our clients may prefer options, but below is a chart of pros and cons of each structure as they relate to current market conditions.

*We understand that some of our customers are averse to and or not allowed to execute Three-Way Costless Collars due to bank restrictions or internal restrictions.

10/5/2023: Crude Oil Pullback

West Texas Intermediate fell over $5/Bbl on Wednesday, the largest daily decline in terms of dollars in about a year. The aggressive pullback was a culmination of multiple factors. We highlight some of these in our Factor Matrix below.

Oil/Product Inventories

The EIA released its weekly oil inventory report Wednesday morning, showing a big drop in gasoline demand. In fact, it marks the lowest level in 25 years on a seasonal basis. Cushing stocks rose modestly, but this was more or less expected as refiners turned to maintenance and reduced runs.

USD/Fed

The Feds rhetoric around higher rates for longer has spooked the equity markets and has caused concerns for future economic growth. At the same time, the US dollar reached a new 11 month high of 107 for the spot index on Tuesday. A higher dollar can make oil more expensive for foreign buys of crude oil that is priced in dollars.

Economic Slowdown

Higher interest rates are causing concern for future demand. The 10yr Treasury hit 4.57 on Wednesday, the highest level since 2007. Threats to global GDP impacts oil demand growth projections.

Trade Flows

Up until Tuesday, WTI had rallied 27% since early July. Speculators have piled into bullish bets in crude oil over the past three months and at the same time reduced outright short positions. Therefore, it’s not too surprising that a myriad of bearish items that hit the market this week caused the spec community to take profits or reduce length (no evidence of this yet until CFTC data is released next week).

The oil price pullback could initiate discussions among OPEC+ to take more action. Additional Saudi and Russian cuts are set to last through year-end. If Brent stays at its current $85 or lower level, we could start to hear rumblings of additional OPEC action.

9/21/2023: Relatively Speaking, WTI Put Options Are Cheap

Market: WTI

Hedge: Q4 WTI Put Options

Price:

WTI's Put options for Q4 ’23 look attractive, and we recommend opportunistically adding downside-only protection.

West Texas Intermediate has rallied 27% since early June, with the prompt month now at $91.27/Bbl. Coinciding with the impressive rally is a drop in overall volatility and a lower magnitude of put skew near the front of the WTI curve.

The chart below shows how the prompt month has moved to an even value for offsetting puts and calls.

As of 9/20, an $80 Put costs $1.30/Bbl to purchase. Adding a put option in Q4 takes advantage of the diminished put skew present near the front of the WTI curve and the lack of duration from a time-value perspective, causing the option to be cheaper.

9/13/2023: Often Overlooked Price Component – NYMEX WTI Roll

Market: Crude Oil

A steeply backwardated WTI curve has increased the value of an often under hedged component of the pricing formula. Producers exposed to the WTI Calendar Month Average Roll (the "Roll") as part of their physical contracts should evaluate hedging at higher-than-normal prices.

The Roll represents a time spread for piped barrels between when they are nominated and when they are delivered. The Roll is a positive contributor in producer pricing formulas when the WTI futures curve is in backwardation (downward sloping), and a negative contributor when the WTI futures curve is in contango (upward sloping).

Calculation

The Roll for a particular calendar month is calculated as the daily average of 2/3 * (Month1 Future — Month2 Future) +1/3* (Month1 Future — Month3 Future) for each trading day in the associated Trade Month Period.

Current pricing

Oct23-Dec23 // NYM WTI Roll: +$0.944

Jan24-Mar24 // NYM WTI Roll: +$0.981

Apr24-Jun24 // NYM WTI Roll: +$0.843

Jul24-Sept24 // NYM WTI Roll: +$0.728

Oct24-Dec24 // NYM WTI Roll: +$0.639

Historical Pricing

2015-2021 Average: -$0.4767 (high August 2018 at $2.03, low May 2020 at -$7.89)

2015-2022 Average: -$0.1815 (high August 2022 at $3.904, low May 2020 at -$7.89)

9/12/2023: End of Quarter (EOQ) Hedging Reminder

Market: NYM HH, NYM WTI CMA

Hedge: EOQ Needs

As 3Q is coming to an end, NYM WTI CMA has rallied significantly on the news of extended OPEC+ Cuts. Natural Gas is rallying this morning as we are moving towards the shoulder season, and we could see upside momentum start to subside. It is time to consider adding 4Q 23 and 2024 volumes to solidify next year’s revenue.

As an added note, heading into the last week of the quarter, we could see some additional selling pressure as producers pile in to top off hedges during the final week. We also typically see a reduction in liquidity as we move past close (1:30 PM CDT) on Fridays. The last day of the quarter lands on a Friday, 29 September 2023.

9/5/2023: OPEC+ Leaders Surprise; Oil Prices Surge

Market: Crude Oil

OPEC+ has provided producers with an unexpected gift this morning. We recommend clients take advantage of the past two days’ price appreciation and add hedges throughout the crude portfolio.

Currently, front-month WTI is up to $87.31, with Cal ‘24 over $80.00 and Cal ‘25 at $75.00. (as of 8:52 AM)

Crude is rallying after Saudi Arabia announced they’ll extend their voluntary production cuts of 1 MMBbl/d through December. This came as a surprise to the market, which anticipated cuts would be extended only one month. Russia is also reportedly extending cuts of 300 MBbl/d through the end of the year.

8/29/2023: Bullish Trend but still need to defend: Buy back your short puts

Market: WTI & Brent

Hedge: Buy Back Short Puts

Aegis recommends that clients consider buying back out of the money short put options. Price appreciation and low time value mean any sold put option can be removed from the book for much less than was received originally.

Clients who took advantage of 3-way collars or other short put option structures when oil was trading in the low $70s have seen their positions provide the upside participation we anticipated. While Aegis remains bullish (watch our recent webcast for this argument) on price through the end of the year into 2024. Several lower probability events could send prices lower.

OPEC+ production cuts have been one of the larger bullish items helping to send the global supply and demand balance into a deficit in 2H23. Any reversal in policy could provide a quick barrage of barrels back into the market. Along the same vein, there are rumors that the Biden administration is using back channels to negotiate some sanctions relief for Venezuela and Iran. On the demand side, many remain wary of the overall macroeconomic situation across the globe, with China being of particular concern should their economy falter. China remains the single largest market for anticipated oil demand growth globally.

This recommendation is an example of portfolio optimization and another opportunity to de-risk when we see value.

If you have any questions or want to discuss this idea further, feel free to reach out to us.

8/9/2023: Crude Put Options are Once Again Viable

Market: Crude Oil

Hedge: Next three, six, or nine months

The recent price run has once again made purchasing deferred put options a viable strategy for crude producers. Front-month WTI has rallied ~$15 since June 28. Over that period, put option volatility has fallen, and the premium associated with time decay has reduced.

Just as we noted back in April, AEGIS thinks this strategy fits well with the current oil market background. The physical market is starting to show signs of tightening while macroeconomic data remains resilient. Put options work as cheap insurance against any unforeseen price collapse while retaining maximum upside.

8/3/2023: NYMEX WTI Futures Rise above $80.00/Bbl

Market: WTI

Hedge: Bal23, Cal 24, Cal 25

Price: Bal 23 $80.12/Bbl, Cal 24 $76.16/Bbl, Cal 25 $71.39/Bbl

WTI is back near YTD highs after Saudi Arabia announced that their 1MMBbl/d of additional production cuts would continue through September. An added bullish surprise in the announcement was that cuts could be “extended or deepened.” Russia also announced it would continue to reduce exports by 0.3 MMBbl/d in September.

Clients with additional hedging needs through the balance of the year should position themselves to take advantage of the recent rally. A sudden change in OPEC policy could introduce significant volume into the market.

7/26/2023: What To Expect From The Back Of The WTI Forward Curve

Market: WTI

Hedge: Cal 2025, Cal 2026

Price: Cal ’25 NYMEX WTI CMA Swap: $70.33

Cal ’26 NYMEX WTI CMA Swap: $66.21

We recommend looking at longer-dated crude hedges as prompt-month WTI closes in on $80/Bbl.

You may wonder what prices in Cal 2025 and Cal 2026 would be if WTI were to extend its rally beyond $80 to $85 and even $90. The chart below shows what the oil curve could look like if WTI rallied but kept the same curve shape. A vertical shift higher would impute a move of $5.38/Bbl improvement for Cal 2025 in our $85 prompt scenario and a whopping $9.86/Bbl for the $90 scenario.

Unfortunately for producers, forward curves don’t typically react this way. Typically, each contract month beyond the prompt month will rise and fall at a smaller ratio to the prompt. For example, today the September WTI contract is up $1.15 or 1.46%, but the Cal 2025 strip is only higher by $0.13 or 0.43%.

The chart below reflects a more realistic curve shape change if the front of the curve were to hit $85 and $90, respectively. In this hypothetical example, we looked for analogs of curve shape when the front of the curve was near our two prompt-month examples. The percent of backwardation between WTI month 1 and WTI month 36 was about 20% in our analog. The $85 scenario below (green line) imputes a Cal 2025 strip at $70.93, and the $90 (light blue line) implies a Cal 2025 $73.81. Is this more realistic scenario versus the chart above, the $90 prompt-month would only imply a $3.00 improvement for Cal 2025 – a far cry from $9.86 above.

Remember that today’s curve shape will not be guaranteed to behave as it did in our analogs. However, we wanted to point out that the back of the curve could act if the front continued to rally. The takeaway is that outright price levels in Cal 2025 and Cal 2026 may not move as much as expected, assuming the front of the curve was to rally $5 or $10.

If there is a need to mitigate risk in either of these tenors, we suggest acting now, as the front of the curve is near the upper end of a 7-month trading band.

7/12/2023: Crude Alert

The prompt month WTI futures contract is currently up $0.84, indicating $75.68, while the prompt month HH contract is currently down $0.073 with a last print of $2.655

The front of the WTI curve has finally broken north of $75 for the first time since the beginning of May. If you have the additional volume you need to hedge, we recommend taking advantage of the current move. There are a couple of ways we could look at positioning given our bullish view.

The first would be to hedge the remainder of 3Q and/or 4Q first, with the goal to hedge into additional quarters as the curve moves up. The second would be to hedge 30%-50% of the expected volume today (short term) and hedge the remainder over time as the market rallies.

Please see our First Look for today’s market-moving headlines.

7/7/2023: Improvement in Midcush Basis

Market: Midcush Basis TM & CMA

Hedge: Basis Swap

Price: Current Bal 23 Swap @ 1.50 (Mid) Current Cal 24 Swap @ 1.400 (Mid)

Midcush basis has improved from prompt month through December 2024 and is currently up ~11% MoM. Midcush has settled between $0.825 - $2.202 since the beginning of 2022, with the current prompt month currently at ~$1.600. AEGIS recommends taking advantage of the market when it reaches the top end of this range and de-risking your crude basis.

As a reminder, we are happy to review your physical contracts so that we can align your hedges correctly. See below for a short description of each and their differences.

The TM WTI Futures contract is the average of the daily settlements of the prompt month TM WTI Futures contract from the 26th of the two months prior through the 25th of the one month prior to the contract month in question. Aug ‘23 is the current prompt month WTI futures contract and will be calculated on the average of the daily settlements during 6/26-7/25.

The WTI CMA swap contract is the average daily settlement of the prompt month WTI futures contract throughout a calendar month. So, the Aug ‘23 WTI CMA Swap price will be the average daily settle of the prompt month WTI Futures contract between 8/1-8/31. The prompt month TM WTI Futures contract will roll over during the calendar month, so the Sep ‘23 TM WTI Futures contract will be the prompt month for 8/1-8/25, and the Oct ‘23 TM WTI Futures contract will be the prompt month for 8/26-8/31.

6/30/2023: Crude Oil Trading Range Bound

Market: NYM WTI CMA

Hedge: Q3 23 - $70.00 Puts - Premium $2.80, 67.50 x 73.50 Costless Collar

Price: Q3 23 Swap - $70.87

AEGIS recommends clients look at utilizing put options in the short term to fight backwardation and allow upside participation should our bullish fundamentals outlook take effect in the physical market.

Since peaking at $83.53, the market has slowly declined and has been range bound between ~ $67.50 - $76.00. Analysts have been observing a more well-supplied physical market than anticipated, attributed to Iran overperforming vs projections and Russian supply not declining.

At the beginning of April, shortly after the announcement of the surprise OPEC Voluntary production cut of ~ 1MM bbls/d, WTI jumped to the high end of the range (low $80s). Since then, the market has been hit with a consistent sentiment of macroeconomic troubles that have continued to cause significant selloffs.

6/22/2023: Quarter-End Thoughts for Crude

Market: WTI
Hedge: Q2 ’24 and Q2 ‘25

Prices have rebounded from monthly lows as we approach not only month-end but quarter-end. We have shown in the chart below the price action for 2Q24 and 2Q25 for those with rolling hedge requirements.
Despite the near-term bearish factors weighing on prices, we're still bullish on crude prices. Expectations of a global oil market deficit of around 1.5 - 2 MMBbl/d in the latter half of 2023, largely stemming from OPEC+'s supply cuts and China's post-pandemic demand recovery, are driving this perspective. However, a slower economic recovery in China and resilient Russian crude exports continue to weigh on prices. AEGIS believes that as the cuts start materializing in the physical market, prices should rally.
We cannot make accurate recommendations or advise you if your forecasts are old. If you have minimum volumes to hedge before the quarter’s end, make sure your production volumes are up to date.

6/9/2023: Iran Deal Rumor Highlights Market Skittishness

Market: WTI, Brent

Hedge: 2H 2023, Cal 2024

Price: 2H 23 WTI Swap @ $70.65/Bbl

Costless Collar @ $67.50 X $73.25

Cal 24 WTI Swap @ $x67.60/Bbl

Costless Collar @ $65.00 X $70.15

Oil markets look to be very sensitive to additional supply news. After yesterday’s rumor about Iran becoming unsanctioned, oil prices plunged. In the short term, if a client cannot bear further price deprecation, we recommend reducing portfolio risk.

An Iranian return to the JCPOA has been in the bearish surprise quadrant of our factor matrix for some time. The mere mention or rumor that Iran could receive a nuclear deal and increase oil exports by 1 MMBbl/d was enough to drive Brent crude nearly 5% lower. The report came from the Middle East Eye but was later denied by the White House.

Oil prices quickly clawed back the losses following the White House’s denial.

AEGIS sees yesterday’s event as a warning that the oil market is poised to react quickly to negative supply news. This time it was Iran, but tomorrow could be something different. Our base case remains bullish for oil prices based on the fundamental outlook that supply will be tight in the 2H of 2023 due to OPEC+ cuts. However, this doesn’t mean the market can’t move lower on events that are difficult to model.

5/31/2023: Saudi-Russia’s Discord and U.S. Debt Drama Fuel Volatility

Recently, crude has been very reactive to news. NYMEX WTI is trading at its lowest in nearly ten weeks. There are two big events this week and next (OPEC+ and U.S. debt ceiling). Oil prices will go lower if both break the wrong way; if you are near b/e costs and have hedging room, consider adding more now.

Market: NYMEX WTI CMA
Hedge: 2H 2023
Price: Costless Collar @ $60.00 x $74.87

Divergent views from oil majors Saudi Arabia and Russia ahead of the OPEC+ meeting (June 3-4) have exacerbated market volatility. While Saudi Arabia's Energy Minister warned oil short-sellers, signaling potential supply tightening, Russia hinted at no further OPEC+ actions, suggesting possible oversupply.
Also, concerns over the U.S. debt ceiling deal have weighed on crude prices. The deal, backed by President Biden, is reportedly expected to encounter resistance in a divided Congress, stirring uncertainty.
A consensus among analysts is that summer demand may support market fundamentals, but price action may indicate otherwise. AEGIS views the oil market as overly focused on immediate bearish factors like economic and banking fears. However, we expect a shift to the upside, notably once the OPEC+ cuts materialize.

5/3/2023: WTI Has Sunk Below $70, Release Some Upside

We recommend opening the upside exposure by buying back the call strikes previously sold as part of costless collars.

Market: WTI CMA

Hedge: Buy Back Call Leg of Previous Collar Structure

Price: Varies

We remain fundamentally bullish on price and suggest using this opportunity to open up upside exposure by buying back call options for much cheaper than originally sold for as part of a collar.

A hypothetical example is below:

Let’s rewind the clock to January of last year. Cal 2023 was trading at $72.23/Bbl, and a costless collar with a $65 floor (Put) allowed for a $78 cap (call). That $78 call had a premium of $9/Bbl last January, but now, due to the price being lower and option time-decay, that same $78 call is today worth $2.33/Bbl (mid). By buying back the call leg of your collar, you release the previously constrained upside.

Buying back calls to release upside isn’t the only adjustment available. Rolling down call strikes to collect premiums may work better for those with high or far out-of-the-money call strikes.

4/28/2023: Leave All Upside Exposure with Low Duration Put

Market: WTI CMA

Hedge: Next six, nine, or 12 months

There are multiple structures and derivatives that can be deployed when hedging. An often-underutilized structure is buying outright put options to protect the downside. And this makes sense as buying an option structure costs money that isn’t immaterial.

But, put options can have their place when management teams desire certain outcomes, and the financial situation supports it. Puts protect to zero and leave all the upside to the company, shareholders, LPs.

We believe buying puts near the front of the curve, six, nine, or twelve months into the future, will take advantage of a higher time-decay or lower valuation of the option as there is less time for the option to expire in-the-money. In other words, nearby puts are cheaper than puts further in the future.

AEGIS thinks this strategy fits well with the current oil market background. Many analysts and management teams are bullish due to varying supply and demand factors. We are bullish too. Also, there is still a cloud of uncertainty in the market surrounding the global economy.

Therefore, a put option with a low duration of, say six to nine months will allow for downside protection during this period but allow for the bullish thesis to play out.

Below are some examples of current put option costs.

This strategy was recently deployed by Hess Corp as announced by their Quarterly Earnings call on April 27. Hess had hedged a sizable portion of their production using puts, but only hedged more near term (under 12 months), because that is the cheapest part of the curve to purchase an option and it left their investors the upside. When asked about hedging 2024, Hess said they would probably buy more puts at the end of 2024 when theta, or time-value of the puts would cost them less.

Of course, hedging in such short stents leaves longer dated risk unmitigated, but it can good way to add to the mix of other strategies.

4/19/2023: A Spike In Hedge Volume, Spurred By OPEC+ Cut

YTD Oil Hedging Recap:

Oil hedge volume surged among AEGIS clients following a surprise OPEC+ supply cut on April 3. The off-cycle cut caught the market off guard and sent oil prices higher.
Many clients took advantage of this rally. Even though AEGIS views oil price risk to the upside, WTI’s recovery to previous resistance levels created an opportunity to de-risk the portfolio at multi-month highs. The chart below shows a surge in both swaps and option structures the Monday following OPEC+’s cut and the $5/Bbl rally in WTI.

As a client, you can access nearly real-time price indications through our Custom Watchlist.

The following will be available once you click through to the Custom Watchlist tab. Each set of indications is customizable by your strategist.

In summary, we see the recent strength in oil prices as an opportunity to de-risk the portfolio. The oil price outlook has certainly gained bullish momentum following the OPEC+ promise to cut, but other bullish factors could fail to materialize.

4/18/2023: Options for Hedging an Acquisition

Our clients frequently engage in acquisitions and divestitures, and we often receive inquiries about hedging around an acquisition.
The most common strategy to hedge prior to a deal closing is to purchase upfront premium puts. Most counterparties do not allow upside-restrictive or "costless" hedge structures because the credit facility is not established until the deal closes. Therefore, counterparties are unwilling to accept the risk of a position moving against you since there is no recourse available to them if you default. Some exceptions to this are parental guarantees or deal contingent swaps.
Suppose the asset is acquired by an entity that already has a hedging line in place. In that case, you may be able to use your existing credit for your current entity/assets to place hedges for the upcoming acquisition. However, you would be limited to the hedge restrictions for that entity unless you buy upfront premium puts, which are not restricted. This strategy is known as the protection strategy.
The Protection Strategy is one of the most conservative strategies to shield large production wedges and acquisitions. The goal of the strategy is to protect production volumes from price deterioration while retaining maximum optionality as the market fundamentals become more apparent. The producer buys downside protection (floor) in the form of puts and/or put spreads. Once the projected production volumes become "hedgeable" per internal/board/bank restrictions, the hedge is completed by adding the ceiling (selling a call) or replacing it with an alternative hedge structure that will offset the majority, if not all, of the premium liability.

If the market rises significantly:
The producer can complete the hedge structure by selling a call (ceiling) at a much higher price than they would have been able to at the strategy's inception. The premium received for the ceiling offsets some or all of the put premium liability.
The producer can sell the put "asset" and replace it with a swap or other hedge structure.

If the market declines significantly:
The producer can complete the hedge structure by selling a call (ceiling) at the same level as the original put (floor), thus turning the entire structure into a swap. The premium received for the ceiling offsets some or all of the put premium liability.
The producer can sell the put asset and replace it with a swap or other hedge structure. The put is worth significantly more than the original cost, so the value received can improve/enhance the position of the replacement hedge.

4/3/2023: OPEC Initiates Off-Cycle Cut; Market Shift Toward Deficit May Accelerate

Our base case prior to this announcement was that the market would move into a slight deficit sometime in the 2H of this year. This allowed us to be modestly bullish. But it required multiple factors to play out (China demand being robust, Russian supply actually falling, Economic Concerns being priced-in and not getting worse). We can now have a little more conviction in this view, but the demand side growth still has risk. It might be concerning that the Saudis feel they had to initiate an off-cycle cut. The cartel has said they will act preemptively, which means they probably forecasted a bleaker outlook, and this would be the way to stabilize the market.

With this in mind, we recommend taking advantage of this jump in price and hedging into it.
Other things to consider here:
• These types of surprise events have an initial reaction and an ongoing effect
• Traders initially close short positions or add to length in a short-term overreaction
• Price tends to relax very quickly after the event
• For persistent changes in the S&D (and this qualifies), the ongoing effect is usually to enter an upward trend
• The curve usually loses any flatness or contango in the front of the curve and enters backwardation
o For this type of event, we would expect about 10% backwardation
• An OPEC+ cut affects Brent more than WTI at Cushing, likely leading to a wider Brent/WTI in the short-term
• In this situation, with low SPR and low product stocks, we see a pronounced increase in bullish risk

3/30/2023: Rolldown Crude Call Strikes to Capture Value

Market: NYMEX WTI
Hedge: Apr23-Dec23 Call Spread (roll short calls down)
Price: Apr23-Dec23 Swap: $72.18 as of 2:45 PM Wednesday
Example Adjustment: Apr23-Dec23 Call Spread: $105 long call x $90.00 short call nets ~1.05 of premium.

Many AEGIS clients continue to hold potential value across their crude portfolio in the form of short-call options. Many high-struck calls of $100+ remain in clients’ portfolios. While AEGIS still holds a modestly bullish view of crude throughout the remainder of the year, we recognize that a material improvement in price may take longer than previously expected due to heightened economic uncertainty. Rolling the call options down will monetize some of the option value which can be embedded into a new hedge position or recouped as cash.
In the example below, rolling a call down from $105 to $90 would net a client roughly $1.05 of premium. This is a real value that can then be utilized to hedge additional barrels throughout the portfolio or taken in as cash.

3/21/2023: Our Two largest Bearish Risks Have Become More Uncertain

Market: WTI
Hedge:
Price:
Banking failures and mixed messages from the Fed have added more uncertainty to the economic outlook. AEGIS continues to see price risk to the upside along the oil curve, but demand growth has become more risked as the global economy deals with the heightened chances of a recession and instability in Western economies.
Two of our Factors below have ruled the headlines in the past few weeks. Banking sector problems have triggered unease about the future of the economy and have put the Fed in a quandary of whether to keep fighting inflation with rate hikes or be cognizant of a fragile economic background.

Oil markets are particularly sensitive to the future demand growth for 2023. There is a fine balance between what is expected for 2023 supply growth and demand growth. This is why the recent economic concerns have helped weigh on crude prices as an additional risk to demand could keep the oil market in oversupply this year.
Individual risk tolerance will dictate whether mitigating further oil exposure this year and next is better, even as many analysts remain bullish. However, AEGIS suggests looking at whether you can tolerate additional downside if the economic landscape continues to deteriorate.

3/17/2023: Three-way Collars in Oil

Market: NYMEX WTI

Hedge: Three-Way Collars

Price: 2H 2023 $60 / $45 X $76.50. Ref swap @ $66.30 (comparative collar 60.00 x 71.96)

1H 2024 $60 / $40 X $74.43. Ref swap @ $65.22

2H 2024 $60 / $40 X $75.10. Ref swap @ $64.37

Oil’s violent move downward in the past few trading sessions has presented a few hedging/hedge adjustment opportunities. Our previous hedge adjustment recommendation was to buy back materially out-of-the-money call options, today it’s to think about how a three-way collar could fit into the portfolio.

Put options have become more expensive than offsetting call options since oil prices have come under pressure. Put option skew has increased, causing puts to be more expensive relative to the call options. This can allow for a more attractive put spread for producers, which is part of the three-way collar.

Our structure examples above show a $60 / $45 X $76.50 for the second half of 2023 (Jul-Dec). The hedge requires buying a $60 put and selling a $45 put, which allows us to achieve a $76.50 cap. How in danger is that $45 put that we would be selling? The chart below shows how often WTI has gone below $45/Bbl. Of course, the past price path means little for the future, but we remain bullish on oil and believe much of the recent sell-off is fear related to the banking sector and not reflective of oil’s supply and demand factors.

Note: Producers often have mixed feelings about three-way collars. Some rely on them for a decent part of the portfolio as they enjoy the added upside the structure provides. Several producers have been stung by them as they don’t provide protection to zero. Some clients can’t even deploy them as their lender, or the internal hedging policy disallows them.

3/16/2023: Oil's Pullback Creates Portfolio Opportunity

Market: NYMEX WTI
Hedge: Adjustment to Call Strikes
Price:
2H 23 1H 24
Call Strike Mid Value Call Strike Mid Value
$75.00 $4.63 $75.00 $6.29
$85.00 $2.31 $85.00 $3.79
$95.00 $1.15 $95.00 $2.30
$105.00 $0.61 $105.00 $1.45
$115.00 $0.35 $115.00 $0.98

Adjusting the call option would align with our fundamental view that the risk in the oil market is to the upside. Producers who have sold call options as part of a costless collar structure may find value in re-purchasing those calls. By buying the call option back, your portfolio could regain the upside participation that is restricted by your current short call.
Two forces are working in support of this opportunity. The first reason is obvious; oil prices have moved lower, down over $10 in the last week. A lower price means a call option will be worth less, assuming all else is equal. Second, not so obvious, put-skew has surged. An oil market in deeper put-skew means that put options are more expensive than the offsetting call option. In this case, a call will lose value as the skew turns toward the puts, making call options less expensive to buy back.

3/14/2023: Economic Slowdown and Uncertainty

Market: NYMEX WTI
Hedge: WTI Swaps or Costless Collars
Price: Apr23-Dec23 WTI mid $73.10
Multiple bank failures have caused market unease, with some market participants doubting how many more times the Fed may raise interest rates and even speculating that the Fed may cut rates. Jefferey Gundlach, “King of Bonds”, said on Monday that he expects the Fed to pause rate hikes after March. Blackrock has said they expect the Fed to continue raising rates until inflation is brought down to the Fed’s target level. These conflicting views add additional uncertainty to the oil market.
One of AEGIS’s largest bearish factors in our Factor Matrix is ‘Economic Slowdown’. We recognize that market turmoil in the financial sector can carry through to the broader economy and therefore impede oil demand growth. Granted, most of the globe’s anticipated oil demand growth for 2023 is expected to come from outside of OECD countries but deterioration in the U.S. economy can put additional downward pressure on U.S. demand.
AEGIS still sees upside risk to oil prices in the next two years, but we cannot ignore potential threats to this view that the latest round of market uncertainty presents.
We suggest taking another look at de-risking the balance of 2023 WTI as an oil price recovery could take longer to play out.

3/9/2023: Bal '23 Crude Portfolio Adjustment

Market: NYMEX WTI
Hedge: Bal ‘23 Call Spread (roll short calls down)
Price: Bal 23 Swap: 76.37 mid as of (9:15 AM CST Thursday 3/9/2023)
Potential Adjustment: Bal 23 Call Spread: $105 long call x $90 short call nets $1.40 of premium mid
AEGIS has numerous clients with short call options, sold as part of collars, struck north of $100. It’s possible to monetize some of these options by rolling down the call strikes. In the example above, a call option of $105 could be rolled down to $90, with the client netting $1.40 of premium (gain) on those barrels.

3/7/2023: WTI Trading Near Upper End of Multi-month Range

Market: NYMEX WTI CMA
Hedge: Cal 2023
Price: Cal 2023 @ $78.98/Bbl mid (As of 8:35 AM CST 3/7/2023)
Cal 2023 Costless Collar @ $70.00 X $86.24

West Texas Intermediate traded above $80/Bbl yesterday in the prompt-month, for the first time since mid-February. The Bal 2023 WTI CMA swap exchanged hands yesterday only 33c shy of $80, a level not seen since January.
With the Bal 2023 WTI swap trading at the upper end of a multi-month band, we suggest looking at adding protection at this level. AEGIS still believes there is more upside potential than downside risk based on the fundamentals; however, we like this opportunity to de-risk some oil exposure when the market trades near both a recent technical and psychological resistance.

2/24/2023: General Market Update - 2/24/2023

WTI came under selling pressure this week, likely due to growing fears of aggressive interest rate hikes for longer and increasing tensions between the US and China.

• China accounts for a significant amount of expected demand growth in 2023, so a reignited trade war with China could lead to an oversupplied market.
• On the flip side, the market is eager to hear if Russia’s surprise 0.5 MMBbl/d production cut in March will carry over to April or if they will cut deeper. Some analysts are pointing to the product price cap as potentially filling Russia’s limited domestic storage, which could result in a backup throughout their entire petroleum complex.
• Geopolitics aside, we remain bullish on the supply and demand picture for the foreseeable future. AEGIS recommends using wider costless collars so long as the floor price + basis allows you to achieve your internal financial goals/metrics.

2/3/2023: Sticky Russian supply could upend a bullish view for 2023

Market: WTI CMA and Brent
Hedge: Cal ‘23
Price: $73.08/Bbl as of 2:44 PM CST February 3, 2023
Many analysts’ bullish views require Russian production to fall in 2023, but so far, there is no conclusive evidence of it, and prices have fallen. A reduction in Russian supply in 2023 in response to sanctions is the biggest bullish surprise on our factor matrix. Therefore, resilient Russian supply would likely cause oversupply for 2023, therefore resulting in inventory builds.
When we take all oil market factors into consideration, we still remain modestly bullish. However, we want to warn against this potential outcome as this could put Cal ’23 price levels at risk.

If you have any questions or want to discuss this idea further, feel free to reach out to us.

1/18/2023: Collars on WTI are ideal for S&D uncertainty

A lot of our clients are not as far along with their year-ahead hedging as they have been mid-January in past years. To catch-up, we like the using collars, because of the uncertainty in the supply-demand fundamentals.

Market: WTI CMA
Hedge: Costless collars
Price: Various; see the chart. Swap at EOD yesterday was about $73.75

There are two major unknowns in forecasting the oil market in the next 1-2 years. On the demand side, it’s China. A WSJ article from Monday sums it up pretty well.

The other is Russia’s output. There is disagreement among analysts how much Russia will bring to market, with some thinking the country would decrease significantly due to sanctions and price caps.

So, if both China and Russia land on the bullish side, it’s extremely supportive for prices. However, if China flounders and Russia hold production flat, the S&D would loosen up.

That’s why we like the floor-and-ceiling nature of the costless collar. Below is a graphical display of how those collars were pricing yesterday after close. Pick your floor (put strike), and you can see the corresponding cap (call) strike.

One thing we do NOT like about collars right now: the call skew is gone. Now there is put skew. This means that the market pricing for put options and call options are not in your favor. If you don’t want to give up that skew, then you could hedge with a smaller volume of swaps instead. Sometimes it’s surprising how little upside you give up, but it depends on volume. I can walk you through how we do that analysis (how much to hedge with collars versus a smaller amount with swaps).

NATURAL GAS

11/08/2023: Give Thanks for the Rally

Market: NYM Henry Hub

Hedge: Cal 26: $4.214 – previous settle

Cal 27: $4.130 – previous settle

Cal 28: $4.037 – previous settle

AEGIS recommends clients with longer-dated hedge requirements or longer-dated NG exposure look at taking advantage of a rapid jump in pricing down the forward curve. The past week has seen Cal 26-Cal 28 rise roughly 10¢; all tenors are trading near or above the $4.00 level. The move comes despite the front of the curve selling off, as shown in the table below. We find it hard to believe the move is attributable to some fundamental shift and, therefore, believe that prices may retrace back to the $4.00 level in 2026 and 2027 and $3.90 in 2028. This could be a short-term opportunity to take risk off the book and add a base layer of hedges at elevated prices.

10/27/2023: Another Summer 24 Hedging Opportunity

Market: NYM Henry Hub

Hedge: Apr24-Oct24 NYM Henry Hub Swap - $3.310

According to CWG models, the American operational model has shown a +28 increase in US gas-weighted heating degree days, which equates to about 36 BCF. AEGIS sent out this recommendation recently to hedge at $3.355/MMbtu (10/17) before the market dipped to as low as $3.238/MMbtu (10/23). This early November cold snap has provided another opportunity to capture Summer 24 pricing at or above $3.300/MMbtu. We find it prudent to take advantage of the early cold as the last two cold starts to November (2018, 2019) were followed by warmer than 30-year normal December months. Warmer weather persisted through most of the winter, which subdued prices due to adequate storage, reducing any fear of a tight supply/demand balance.

Projection assumes 10-year normal weather.

10/17/2023: Summer 2024 price susceptible to decline

Market: NYM Henry Hub

Hedge: Apr24-Oct24 NYM Henry Hub Swap - $3.355

AEGIS strongly recommends hedging your Summer ’24 natural gas exposure with a swap at the current strip. We anticipate a looser supply/demand picture and higher storage level compared to last summer. With no material demand growth expected and gas production remaining high, we are concerned that Henry Hub could fall to similar or lower levels than we experienced in Summer ’23. Henry Hub has averaged $2.386 for Apr ‘23-Oct ‘23, with a monthly low of $1.991 in Apr23 and a monthly high of $2.764 in Oct23. The current summer ‘24 swap is bid at $3.355. We recommend using structures that help maximize your protection levels.

10/11/2023: Hedge Winter ’24-’25 As Bullish Transition Period Uncertain

Market: NYM Henry Hub

Hedge: Winter ’24-‘25 NYM HH Costless Collar

$3.75 X $5.09

$3.50 X $5.70

Ref swap @ $4.19 (bid)

Priced as of 12:05 PM 10/11

We recommend hedging the Winter ’24-’25 (Nov ‘24- Mar ‘25) Henry hub strip with a costless collar. With the swap at $4.24/MMBtu, this tenor has great value, a 17c rally in the past seven sessions, and call skew at elevated levels.

We have continued to convey our bearish tone for 2024 gas, but often treat the transition between 2024 and 2025 as the demarcation line between bearishness and bullishness (due to LNG). Yet, different timing issues can influence the eventual price response.

It’s entirely possible that on the bullish end, we start to see prices move higher in late 2024 on the backs of new LNG demand and, therefore, a tighter supply-demand balance. However, the “bullishness” could lag well into 2025, depending on many factors (we are happy to discuss one-on-one). The graphic above represents our transition window, where forward-looking fundamentals shift more bullish, and prices are forecast to appreciate.

On the topic of skew, the chart below shows our measure of volatility skew present in the market for Winter “2”, which currently is a measure of the Winter ’24-’25 strip. There is a higher-than-normal amount of call skew present in this tenor. If we understand that “normal” call skew is a 1:1.5 put-to-call ratio, then the current measure of skew is a 1:2.0 put-to-call ratio. In other words, producers are able to receive more upside participation with a costless collar for the same amount of downside protection.

In summary, the uncertainty around when exactly fundamentals will shift into bullish mode, and the amount of historically elevated call skew have us pushing for derisking the Winter ’24-25’ strip.

8/31/2023: Rally in Natural Gas off Hot September Projections | Shoulder Season Looming

Market: NYM HH

Hedge: Swap/Costless Collars

Price: Bal 23 NYM HH LD Swap $3.202 (Mid), Q1 24 NYM HH LD Swap $3.672 (Mid), Summer 24 NYM HH LD Swap $3.289(Mid)

AEGIS recommends taking advantage of the recent Natural Gas rally and adding any remaining hedges needed in in Bal23 and 1Q24 or full year 2024. 4Q 23 (Bal 23) is up $0.128 (4.16%), Q1 24 is up $0.082 (2.28%), and Summer 24 is up $0.041 (1.26%) on the most recent weather projections for September.

The chart above, from the Commodity Weather Group (CWG), shows an anomalous heat forecast for the month of September. At 230 cooling-degree days (CDDs), September would be warmer than June, where June is typically much warmer than September.

Shoulder season is approaching, and the extreme heat could disappoint. This really is another great opportunity to add hedges and de-risk your natural gas portfolio.

8/21/2023: Midcont Basis Rallies, Presents Producer Hedging Opportunity

Market: NGPL Midcont Basis

Hedge: Basis Swap

Price: Bal 23 Basis Swap: (0.2617), Cal 24 Basis Swap: (0.1403), Cal 25 (0.1847)

AEGIS recommends de-risking some of your production in the Midcontinent region amid price strength on the backs of anomalously warm weather.

NGPL Midcont basis has consistently improved down the curve since the beginning of 2023. The volatility has continued throughout the year; however, we see now as an opportunity to de-risk some volume and capture prices near the year-to-date highs. If you are currently living in the South or Midwest, it should be no surprise that we have been experiencing an exceptional heat wave that has increased demand in these regions and subsequently caused prices to rally. We think it prudent to take advantage of the extreme summer weather and layer in hedges for Cal 24 ahead of shoulder season.

If you have any questions or want to discuss this idea further, feel free to reach out to us.

8/15/2023: Another Opportunity to de-risk Apr24-Oct24 (Summer Strip

Market: NYM HH

Hedge: Summer 24 Swaps

Price: $3.350/MMbtu (Mid)

AEGIS remains fundamentally bearish in Summer 24 and continues to recommend adding downside protection for next summer. We started pointing out our bearish Summer ’24 view in March 2023 when the swap was around $3.50. The current swap is closer to $3.35 today. Our bearish view on price is due to the lack of new demand coming online during the first half of 2024 and increasing supplies from the Permian. According to Bloomberg, Golden Pass’s first train startup is expected to be pushed back from April 2024 to July 2024, which results in 61 Bcf less feedgas demand in Summer 24, furthering our demand concerns.

The April 2024-October 2024 NYM Henry Hub strip has seen an about 15¢ improvement since August 3, 2023, and we are continuing to recommend our clients to take advantage of the rally and take a serious look at adding downside protection in Summer 24 using swaps to maximize their secured revenue.

8/8/2023: Cal 26 NYM HH Strip Elevated Versus Other Calendar Strips

Market: NYM HH

Hedge: Cal 2026 Swap/Costless Collars

Price: $4.010/MMbtu (Mid), $3.75 x $4.50 (Mid)

AEGIS Recommends targeting Cal 26 at these levels specifically since we see no fundamental reason this strip should be trading at an elevated price vs the rest of Cal 25-27. Calendar 2026 NYM Henry Hub strip has improved 3.35% since early July and is now the only calendar strip above $4.00. This could be a result of trade flow/buyer interest in this tenor via speculators or consumers.

Swaps can be utilized to get as close to the $4.00 level as possible to maximize future cash flow protection. Another approach to hedging would be using Costless Collars and capturing value in the options market. The consensus of global bullishness for the outer years of natural gas has given producers a unique opportunity to enter a full calendar year strip with upside option and fundamental skew.

7/28/2023: Appalachian Gas Basis Remains Little Changed After MVP News

Market: Dom South Basis

Hedge: Basis Swap

Price: Bal 23 Basis Swap: (1.3525), Cal 24 Basis Swap: (0.9175)

AEGIS recommends looking at de-risking some of your Dom South Basis exposure as our view remains unchanged. The probability of substantial upside price movement remains low in our view despite positive news from the Supreme Court. Recently, the high court lifted the stay that halted construction on the 3.5-mile corridor through Jefferson National Forest and stripped all courts of jurisdiction to review decisions made by federal agencies.

Dom South saw little to no improvement in the back of the curve Cal ’24 and ’25) after the news of the stay being lifted. The thought of a potential bullish sentiment on the news of the lifts was unsupported, with little to no trading activity.

There was a slight improvement ($0.04/MMBtu) and activity in Bal 23 with the forecast of the heat wave extending into the Midwest and Northeast with peak heat index predictions as high as 110° Fahrenheit. These temperatures hitting these high-demand regions could potentially cause a substantial increase in CDDs (demand) in the region.

In summary, the MVP pipeline will move ahead, and this news was likely already assumed or digested by the basis markets. Moreover, an in-service MVP is unlikely to have an outsized impact on the region, as once thought. More on this in the article link below.

Please reference this article written by Jay Stevens of our research team for additional color and as a reminder of our view of how the completion of the MVP pipeline could affect natural gas pricing in the short and longer term.

7/21/2023: Midcont. Gas Basis

Market: Midcont. Gas Basis

Hedge: NGPL-Midcont.

Price:

We recommend derisking Midcontent gas basis as forward pricing provides solid value.

Midcont. basis markets have been quite volatile over the past two years (COVID impacts, sky-high Henry Hub prices). In comparison, the past six months have been much less volatile and traded much more flat.

The chart below shows NGPL-Midcont. broken down by seasonal strips. The Summer 2024 strip is currently at -$0.32/MMBtu, and Winter 23-24 is trading at a premium to Henry Hub of $0.09/MMBtu. Both of these values are about 50% higher than year-ago levels. Besides Henry Hub being much lower, basis tends to tighten when Hub prices collapse, a destination market for Midcont. gas has been strong as well.

The Chicago gas market has strengthened over the past 18 months. The Winter 23-24 strip has climbed $0.20 since early 2022. This, in turn, has helped pull Midcont. basis higher. The chart below shows how NGPL-Midcont. has correlated with Chicago basis since 2020.

The chart below breaks down the relationship between the two basis locations. The regression shows a high correlation between the two gas markets but also reveals some dispersion when Chicago prices move above $0.75/MMBtu. These periods are often associated with acute demand in winter months, when Chicago gas prices can become inelastic. In other words, Chicago gas can keep running higher and Midcont. gas is left behind.

The last two winters have brought high volatility and price spikes in the Chicago market. This has likely translated to higher premiums in the forward curve. We consider this a risk premium that producers can take advantage of. If Chicago has a risk premium in its forward curve and Chicago and Midcont basis are highly correlated, then we can say that NGPL-Midcont. has a risk premium built into it. We suggest selling this risk premium.

6/23/2023: Major Waha Improvement

We continue to recommend that clients de-risk Waha exposure for Bal 23 and Cal 24. Winter ‘23/’24 and Summer ‘24 are priced at their strongest in over a year.

Just under a month ago, we recommended that clients consider reducing Waha basis risk. Below is the note we sent at that time. Prices have continued to improve since then. Power burns in Texas have been strong this month, while trade flow from several transactions in the Permian could have influenced producers to buy back Waha positions.

6/20/2023: Bullish risks to the bearish thesis on 2024 natural gas

Market: NYMEX Henry Hub
Hedge: Cal ‘24
Price: $3.510

While we continue to see persistent oversupply in the gas market through the end of 2024, there are factors that could upend this view.

The largest unknown is weather; a much colder than normal winter could lead to significant draws on gas storage, tightening the market and reducing or even erasing the current storage surplus. The combination, while unlikely, of a hot summer and a cold winter together would lead to an even deeper reduction in inventories.

The vast majority of LNG facilities will come online in 2026 and 2027, with a few plants entering operation in late 2024 and 2025. However, some facilities could begin taking gas sooner than expected. Exxon’s Golden Pass export terminal is one facility that has been flagged for a potential early start-up at the end of Q1 2024 rather than in late 2024.

If gas prices remain low enough for a long enough period, material decreases in production could occur. While most analysts would view this scenario as highly unlikely due to associated gas output following different economics, it is possible.

For consumers of natural gas, these scenarios could have a large negative effect on cash flows. We recommend eliminating the potential risk from unknown variables and hedging a portion of your natural gas consumption.

6/14/2023: Value Remains in Converting Collars to Swaps

AEGIS is recommending clients look at restructuring NG collars to enhance a swap, thereby increasing downside protection and ensuring higher cash flow.

Market: NYM HH
Tenor: Cal 24
Hedge: Convert collars into swaps
Price Example: $3.50 x $5.50 collar – collect ~$0.48 of premium enhance swap from $3.420 to $3.900.

Over the past few months, we have recommended clients roll down call strikes on collars and collect on the premium gained from the sale of the new call strike. The opportunity to collect on a rolldown has passed; however, we still see value in these types of restructurings. Clients needing or wanting to shore up cash flow into 2024 can increase their weighted average floor price by converting collars into swaps.

6/7/2023: Bearish Outlook for Cal 24 Natural Gas

We recommend hedging Summer 24/Cal ’24 despite reaching early 2024 lows.
Market: NYMEX HH
Hedge: Cal 24 NYM HH LD Swap and/or Apr24-Oct24 NYM HH LD Swap $3.22
Price: Cal 24 Swap: $3.43 as of 2:45 PM 06/07/2023
Why would we suggest adding hedges in 2024 now? Well, first, we have consistently been recommending hedging Cal 2024 for some time as we have viewed fundamentals to be weak during this period. Second, with the recent news about 2 Bcf/d Mountain Valley Pipeline (MVP) being included in the debt ceiling bill, Henry Hub is set to be exposed to more supply in 2024 than previously assumed.
With the addition of MVP news and the potential supply it will inject into the market, we feel even more justified in this view. AEGIS would recommend de-risking a good portion of your natural gas portfolio in Cal 24 and taking advantage of the current pricing or setting a target that makes economic sense and capturing that pricing as/if the market allows.

5/26/2023: Good Value In Winter HSC Basis

Market: HSC

Hedge: Winter 23-24, Winter 24-25

Price: Nov23-Mar24: -$0.050

Nov24-Mar25: -$0.100

We recommend taking advantage of a strengthening Houston Ship Channel (HSC) Basis for the next two winter strips.

The return of Freeport LNG has helped push HSC basis to near parity with Henry Hub for Winter ‘23-’24 and Winter ’24-’25. Except for periods of elevated weather-driven demand, HSC should trade at a discount to Henry Hub as gas needs to flow east to LNG demand centers in Louisiana and TX/LA border.

The chart below shows the gas pull from Texas toward Louisiana since 2017. As more LNG liquefaction has materialized in Louisiana, gas has been directed toward the Henry Hub area. Over the next 18 months, more supply will be hitting the Texas Gulf, originating from the Permian and Eagle Ford. The additional supply in the HSC area will not be matched by offsetting demand until new LNG facilities come into service in late 2025.

Historically, HSC in winter often traded between -$0.10 to +$0.10/MMBtu, depending on the weather. Despite times of elevated weather demand like last December, we see current winter strip pricing attractive given the new dynamics affecting the ship channel area.

5/25/2023: Uphill Battle For Stronger Waha Basis until 2025

Market: Waha

Hedge: Bal 2023 – Winter 24-25

Price: Jul23-Oct23: $-0.980

Nov23-Mar24: $-0.700

Apr24-Oct24: $-0.945

We recommend reducing exposure to Waha basis through Cal 2024 amid recent price movement and continued stress on egress.

Gas prices in West Texas have improved over the past six weeks, some maintenance has concluded, and gas demand for Summer looks robust. However, we view this non-trivial rise in price as an opportunity to de-risk as price probability still favors the downside.

Two brownfield pipeline expansions slotted for later this year are expected to provide little relief as producers are likely to fill the extra egress rapidly. This dynamic keeps the risk-skew for Waha basis to the downside.

Substantial takeaway capacity is slated to show up at the end of 2024 with Matterhorn Express. The Waha forward curve does reflect better on average pricing in Cal 2025 and beyond. Cal 2025 doesn't come without risk just because a shiny new pipe is coming into service, but today we highlight the more obvious risk over the next 18 months.

5/16/2023: Front Month Gas Rally Presents Hedging Opportunity

Market: NYMEX HH

Hedge: Jun23-Oct23 NYM HH LD Swap

Price: Jun23-Oct23 Swap: $2.554 as of 1:23 PM 05/16/2023

Since May 5, 2023, natural gas for the balance of summer has had a ~9% move upward from $2.356 to the current price of $2.561. The rally has largely been driven by speculation of slowing production due to a drop in rig counts and summer cooling demand that could ease some oversupply concerns.

This move is more about headlines, as the market has not seen proof in the physical market. AEGIS sees this as an opportunity to de-risk a portion of the portfolio in the front of the curve above the $2.50 level.   

5/12/2023: Winter gas storage scenarios

Market: NYMEX HH

Hedge: Cal ‘24

Price: Swap @ $3.490

Costless Collar @ $3.00 x $4.230

AEGIS recommends hedging the Cal ’24 strip, as a normal or milder-than-normal winter is likely to leave storage levels extremely elevated.

While a colder-than-normal winter could see inventories drawdown, which could boost prices, the probability of that occurring is lower than the probability of a normal winter.

AEGIS has modeled three potential storage paths for the withdrawal season under various weather scenarios. Our base scenario utilizes the 10-year average weather, the cold scenario uses 10% more degree days, and the mild scenario runs with 10% less.

The mild scenario would result in storage levels exceeding the five-year range and ending near the top of the 10-year range. The cold scenario would lead inventories to finish the season around 1.20 Tcf, close to the bottom of the five-year range. We do not control for price in this model; therefore, for storage to avoid filling to near-capacity, low gas prices will need to be sustained to pick up additional demand from the power sector.

The chart below shows the number of degree days for each winter season of the last 22 years and where our different scenarios would rank. While the mild scenario would be the third warmest winter season of the last 22 years, the cold scenario would be the second coolest. For an explanation of degree days, please check out NOAA.

In summary, we see the Cal ’24 strip as risked to the downside, especially if the weather is below climate norms. The chart below shows the cumulative departure from normal weather for each year of the past 22 years. Winter seasons have consistently trended warmer, lowering the probability of a colder-than-normal winter.

5/10/2023: Oil and Gas Producers Are Not Properly Hedged in Cal 2025 – Over $7.5 Billion at Risk

Market: Henry Hub

Hedge: Cal 2025

Price: Swap at $4.12

AEGIS recommends hedging production in 2025 as tremendous value remains at risk.

In the aggregate, our clients have hedged only about 28% of PDP volumes in 2025. When current Cal 2025 prices are attributed to unhedged volumes, at least $7.5 billion is still at risk. Note this is only PDP; forecasted volumes are not computed and would show a much larger gap.

Why focus so much on Cal 2025 gas when we are fundamentally bullish? Number one, its risk management, and the future is uncertain. Second, Nymex over $4.00/MMBtu works for almost any producer, even if costs escalate. Lastly, our risk modeling, irrespective of a fundamental view, shows more potential for the downside.

The graphic below shows our modeled natural gas risk bands. This risk modeling is the same inputs that are utilized by our Recommend module. As of May 8, the Cal 2025 strip was trading at $4.16/MMBtu with a 50% chance that Nymex Henry Hub would settle between $5.20 on the high side and $2.34 on the low end.

4/26/2023: Sell Deep OTM Cal 24 Calls to Uplift Bal Summer 23

Example Hedge: Client Sells Cal 24 $6.00 Call and receives ~$0.230 of premium and embeds premium into a Jun23-Oct23 Swap.

Market: NYMEX HH LD

Hedge: Selling Cal 24 Calls to Uplift Jun23-Oct23

Price: Cal 24 $6.00 Call is worth ~$0.230

Jun23-Oct23 HH Swap: $2.518

Sell Cal 24 $6.00 Call for $0.23 // 10,000 MMbtu/month // Receive $27,600

Embed that notional premium above into position below.

Sell Jun23-Oct23 enhanced swap for $3.070 ($0.552 uplift) // 10,000 MMbtu/Month

We are continuing to explore options for many of our clients who have asked how to address low Summer 2023 gas prices. (Please see attached email for our other solutions to this problem)

The strategy takes advantage of deep Out-Of-The-Money (OTM) options in a part of the curve that we are fundamentally bearish and utilizes that value to uplift a near-term tenor, such as Summer 2023. This strategy is best for clients who need to add hedges in 2023 but also need higher prices than the current market allows.

Selling calls do come with some risks and should be thoroughly discussed with your strategist to ensure an understanding of those risks.

4/25/2023: Cal '25 Trade Actvity

Market: NYMEX HH LD

Hedge: Cal ‘25 Costless Collar

Price: $4.19 swap (as of 1:15pm)

$3.50 x $5.52 costless collar

Aegis recommends clients take advantage of the resilient forward curve price in 2025 to layer in additional NG hedges. Our fundamental outlook leans toward the bullish case in 2025. However, the 2025 gas strip is likely to experience short and medium-term declines, as weaknesses in the next two gas seasons influence the 2025 strip. Leaving 2025 unprotected now could result in a difficult decision when the year approaches, especially if bullish factors (LNG growth) are late or delayed.

We have seen a number of clients add protection as Cal 25 rallied throughout the month. The chart below shows Cal ’25 natural gas trade activity from AEGIS clients.

4/21/2023: Permian Pipeline Delay Causes Basis Risk Mismatch

Market: Waha and HSC Basis

Hedge: Unwind HSC and Hedge With Waha

Price: HSC 4Q 2023 Swap @ $-0.335/MMBtu

Waha 4Q 2023 Swap @ $-1.36/MMBtu

Oil and Gas Producers that have hedged Houston Ship Channel (HSC) basis in Q4 2023 may now be exposed to Waha due to a Kinder Morgan pipeline expansion delay. The pipeline in-service shift caused a flurry of trading activity Thursday morning on both Waha and HSC.

Producers hedged at HSC, assuming that their gas would be sold downstream in Houston, are now buying back select months at HSC and selling Waha as their risk exposure has changed. Non-Permian producers exposed to HSC could see some appreciation in basis as those out west buy back their HSC in favor of hedging their local basis.

On their late Wednesday afternoon earnings call, Kinder Morgan pushed back their in-service date for their Permian Highway Pipeline expansion (PHP) to December rather than the initial target of November 1, 2023. The company cited “supply chain constraints for certain components and materials.”

4/21/2023: Natural Gas Hedge Activity and Risk Bands

Nymex Natural Gas Hedging Recap:
Gas hedging volume so far this year is very similar to activity for the same period last year. Hedging picked up in mid-February following a rebound in Henry Hub from multi-year lows. Most trade activity was concentrated in ’24 and ’25 during mid-February, with many clients already sufficiently de-risked in the Summer 2023 strip.

Our fundamental outlook remains bearish in the curve through 2024. AEGIS believes oversupply will persist for this time frame. The narrative begins to become much more bullish in late 2024, but in earnest in 2025, with a “wall” of LNG set to hit the gas market. However, there is a risk to our base bullish case in 2025 and beyond if LNG facilities are delayed.
Cal 2024 and Cal 2025 remain over $4/MMBtu for now; we recommend locking-in at least base layers of hedges in these tenors.

The current options market implied probabilities suggest that prices could range between $2/MMBtu on the low end and about $5.25 on the high end for the 25th and 75th percentiles.
You can view current pricing via the custom watchlist on the Platform — an example of the custom watchlist is below.

4/13/2023: Why You Should Hedge 2025 Henry Hub

Market: NYMEX HH LD
Hedge: Cal 2025
Price: Swap @ $4.06/MMBtu
Costless Collar @ $3.50 X $4.90

We recommend implementing a base layer of protection for 2025 at a minimum. The Cal 2025 Henry Hub is currently hovering just above $4.00/MMBtu. Bearish factors affecting the next eighteen months may impact the Cal 2025 strip.
Our fundamental outlook leans toward the bullish case in 2025. However, the 2025 gas strip is likely to experience short and medium-term declines, as weaknesses in the next two gas seasons influence the 2025 strip. Leaving 2025 unprotected now could result in a difficult decision when the year approaches, especially if bullish factors (LNG growth) are late or delayed.

4/13/2023: Uplifting the Summer 2023 Natural Gas Strip

Market: NYMEX HH LD
Hedge: Jun 23 –Mar 24 (Blend and Extend) Using Collar Structures
Price: Jun 23- Oct 23 Swap: $2.454 as of 8:20 AM Thursday
Jun 23-Mar 24 Swap: $2.910 as of 8:20 AM Thursday

Example Hedge: Jun 23 – Mar 24 Three-Way Collar: $3.00/$2.25 x $3.500
Floor/Long Put @ $3.00
Sub-Floor/Short Put @ $2.25
Ceiling/Short Call @ $3.500

Many of our clients have asked how to address low Summer 2023 gas prices.
If the current goal is to find a way to get above $3.00 on remaining hedges for Summer 23, we recommend looking at a blend and extend method, which allows us to make use of winter call-skew to uplift your remaining Summer 23 hedges.

Benefits to this structure:
• Providing your hedge book with a potential ~40c uplift to your floors.
• Continuing to have upside participation on those volumes if weather provides an uplift to winter pricing.
• Allows clients to sell an option to uplift a structure.
• Even if the market fell and settled at $2.00, a client would still realize $2.75 or an ~17c uplift to the current Jun23-Oct23 Swap.
• It provides the flexibility to buy that short put back for cheaper than it was sold for if the market were to rally and the price of the option was to deteriorate.
Using short options to your advantage can be highly beneficial; however, like most good things, they do come with risks that we want to make you aware of.
• Establishing this $3.00 floor comes at the cost of also establishing a sub-floor (short put) which has the potential to deteriorate that $3.00 floor 1:1 should the market settle below $2.25.
• Buying the short put back as the market falls can be costly and would likely not be an efficient use of capital.
• These structures can be viewed as “wrong way risk,” and some counterparties may decline to enter into this trade.
In summary, this hedge provides a solution for those who need to establish higher floors this summer.

3/28/2023: Summer '23 Gas is Weak, Summer '24 Could Be Weaker

Market: NYMEX Henry Hub
Hedge: Summer 2024
Price: Swap @ $3.376/MMBtu as of March 28, 2023, 9:06 AM
We recommend adding hedges for the Summer 2024 strip (Apr-Oct). Fundamentals are likely to keep prices under pressure this summer, and next summer doesn’t look any better. Gas demand growth is stalled until late 2024, and supply is still expected to grow even as gas prices have plummeted.
The Summer 2023 strip was trading at $2.52/MMBtu as of March 28, the lowest level since May 2021. Bearish fundamental forces pushing this summer’s gas to nearly a three-year low are expected to continue into 2024. While we expect continued volatility in the gas market, we see the current 2024 strip as overvalued.

3/24/2023: Rolldown Gas Call Strikes to Capture Value

Market: NYMEX HH LD
Hedge: May ‘23-Oct ‘23 Call Spread (roll short calls down)
Price: May ‘23-Oct ‘23 Swap: $2.585 mid as of 3:15 pm Thursday
Potential Adjustment: Example: May ‘23-Oct ‘23 Call Spread: $5.00 long call x $3.50 short call nets ~$0.120 of premium.

Natural Gas prices continue to be under pressure. AEGIS sees an opportunity in a down-trending market to optimize your portfolio by taking advantage of the value you have already created using derivatives.
The opportunity will allow monetization of some of the portfolio’s value or use that value to raise your floors and secure more cash flow. The suggestion is to roll down call strikes from May 23-Oct 23 from a $5.00 cap (call) to a $3.50 cap (call). In our example, the adjustment can net approximately $0.120/MMBtu of value, which can be embedded into a new swap position if the intent is to add more volume or monetize that roll down and use that cash elsewhere.

AEGIS’s view is that Nymex settlements above $3.50/MMBtu this summer have a low probability based on the fundamentals.
We use the above strike prices as an example, but other call-option levels would also be applicable.

3/7/2023: Cal '25 Natural Gas Rally

Market: NYMEX Henry Hub
Hedge: Cal ‘25 Costless Collar
Price: Cal 25 Swap: 4.30 as of 3:20 pm Tuesday
Cal 25 LD Collar: 4.00 x 4.75 as of 3:20 pm Tuesday
Natural gas prices have posted a considerable rally over the past few weeks with the 2025 Henry Hub calendar strip rising from $3.70 to $4.30.
This could be a good opportunity to add hedges. AEGIS expects the supply and demand balance to continue to be oversupplied for the next two years, with production growing and no additional demand from LNG exports.

3/2/2023: Unconventional opportunity for Summer '23 NG

Market: NYMEX Henry Hub
Hedge: Summer ’23
Price: Summer ’23 @ $3.160/MMBtu (As of 2:40 PM CST 3/2/2023)
Summer ’23 Costless Collar @ $2.75 x $3.54
Summer ’23 Three-Way Collar @ $2.75 / $1.75 x $3.700

Natural gas has bounced nearly 70c to $2.78 in the last week. The Summer 2023 strip has also recovered from 2023 lows, rising above $3.00 to $3.16 as of Thursday afternoon. We see this price move as an opportunity to entertain an often less-used option structure, the three-way collar.
The subfloor, or sold put, in our recommended three-way collar is set at $1.75. Natural gas rarely trades below this price level; if so, it tends to be relatively brief. The chart below shows daily natural gas prompt prices since 1995. There have only been a few times this century when gas traded at or below $1.75; one of those periods was during the COVID-19 pandemic.
There are fundamental reasons why natural gas shouldn’t trade below $1.75 for long. This doesn’t mean it can’t or won’t, but for the Summer ’23 strip, we think this is a reasonable level to sell a put option as part of a three-way collar. Selling the put allows additional upside participation to $3.70.

3/2/2023: Summer 2024 Natural Gas Up 12% from 12-month Low

Market: NYMEX Henry Hub
Hedge: Summer ’24
Price: Last Trade Price: $3.55 (As of 8:47 AM 3/2/2023)
Summer ’24 Costless Collar @ $3.15 x $4.00
Summer ’24 Swap @ $3.50+ (Target)

Summer ‘24 has continued to see strength. The strip has traded off its one-year low of $3.170 to a current price of $3.55 in the last seven trading days. These types of rallies are something AEGIS recognizes as opportunities to layer in additional hedges at a solid psychological level of $3.50.
Typically, the market can show resistance at these incremental levels because of how the options markets behave. Therefore, resistance can come in 25¢ increments and could likely stifle further upward price movement for that tenor.
Gas market fundamentals also point to potential price headwinds above $3.50/MMBtu. In the power market, PRB coal competes with gas for thermal power generation in a gas equivalent price band from sub-$2 gas to mid-$3’s. In other words, as gas prices rise beyond about $3.50, gas demand can fall as coal picks up share in the power market. This depends on the price of coal, which has been volatile in the past two years.
When we look at the power market, gas-fired generation already competes with coal in June and September. In peak summer, gas’s advantage as a fuel still has a comfortable price advantage against coal.

2/24/2023: General Market Update - 2/24/2023

AEGIS remains bearish on Summer 23. Prices bounced off their one-year lows this week and are currently at around $2.880, but we believe this tenor would remain under selling pressure.

• It is possible that demand could surprise to the upside if the forecasts remain cold for the rest of winter and flip to a very warm start to the summer. However, we still believe the US market will remain oversupplied, so we recommend adding volumes via swaps or tight costless collars to cover your fixed costs.

Cal 24 has bounced significantly off its one-year low of $3.3950 and is currently printing $3.540.

• We still have a bearish outlook on this tenor, so we recommend taking advantage of this week’s rally to add downside protection if you are lightly hedged. We also recommend swaps or tight costless collars, so long as the floor price + basis allows you to achieve your internal financial goal or metric.

2/21/2023: Southeast gas basis at risk this summer

Market: Sonat, Transco Z4
Hedge: Summer ‘23
Price: Summer ’23 @ $0.18/MMBtu
We are concerned that low Henry Hub prices will incentivize strong gas burns for power and possibly stress the southeast gas market. So far this year, total power generation is down about 5%, gas use for power is up 5% and coal is down nearly 40%. Evidence that gas is stealing market share from coal could result in record gas demand for power this summer. Last summer, prompt-month Sonat basis traded up near $3.50 over Hub. Seasonally warm weather this summer could incite another round of elevated prices for the southeast.

2/15/2023: Learn why we believe the forward curve is overvalued

Market: Henry Hub
Hedge: Winter ‘23/’24 – Summer ‘24
Price: Winter ’23-’24 @ $3.85/MMBtu
Summer ’24 @ $3.33/MMBtu
We are concerned Winter ’23/’24 and Summer ‘24 may be overvalued as we have reentered a period of rising production and stagnant demand. We will be diving deeper into the fundamentals on our Webcast later today, Thursday, February 16 at 2:00 pm Central. You can register Here.

2/10/2023: Seasonal NG spreads are historically wide with Nov. '23-Oct. '24 at risk

Market: Nymex Henry Hub

Hedge: Winter ’23-’24 and Summer ‘24

Price: Winter ’23-’24 @ $3.836/MMBtu as of 10:51 PM CST February 10, 2023

Summer ’24 @ $3.352/MMBtu as of 10:51 PM CST February 10, 2023

The spread between this summer (Summer 2023 strip) and the next winter (Winter 23’-’24 strip) has blown out. Prices for nearby gas contracts have deteriorated, but next winter has not seen the same amount of downside pressure. We think it is only a matter of time.

• Winter 23-’24 is trading at nearly a dollar premium to the Summer ’23 strip. In fact, it’s the widest contango at this point in the year going back at least twelve years.

• Bearish market forces are weighing on the front of the curve and we believe those bearish fundamentals, at best, continue into 2024.

Hedging the next winter and summer ‘24 strips may be a prudent move as AEGIS’s view is that the downside risk greatly outweighs the upside probabilities.

If you have any questions or want to discuss this idea further, feel free to reach out to us.

2/7/2023: Summer Waha basis continues to improve

Market: Waha basis
Hedge: Summer 2023
Price: -$1.28/MMBtu as 2/7/23

Summer Waha basis has improved by 65c since mid-January. The Waha summer ’23 strip is now at the highest level since January 2022. We previously recommended taking a look at hedging Summer Waha on January 17, but a few things have helped Waha improve over the past three weeks.
• Summer Henry hub has continued to decline since last month, down 17% since January 17. At the same time, Waha basis has improved by 22.08% to -$1.28/MMBtu. The slide in Nymex Henry Hub could be supporting regional basis.
• Since our last Waha recommendation on January 17, Kinder Morgan announced the anticipated return of Line 2000 near Coolidge, Arizona in February. The return of Line 2000 would return approximately 0.6 Bcf/d in westbound flows to Socal markets.

The price improvement for Waha Summer 2023 to -$1.28 presents an opportunity to hedge, if you haven’t done so already, in a timeframe that we believe still has downside risk.

If you have any questions or want to discuss this idea further, feel free to reach out to us.

2/1/2023: Hedge Summer '23 Midcont. basis

Multiple Midcont. basis markets have improved relative to Henry Hub over the last 30 days. For example, Summer ’23 NGPL Midcont. basis is at its strongest level since January 2022.
Market: Summer ’23 NGPL Midcont. Basis
Hedge: Short Swaps
Price: $-0.41
Along with some other basis markets in the US, Midcont. basis has improved as Henry Hub has fallen over a dollar in the last month for the Summer ’23 strip. Fundamentally, as Henry Hub prices have fallen below $3.00/MMBtu for this summer it is possible that supply growth may be more muted. The price improvement has been limited to Summer ’23 for Midcont. basis markets. Beyond this summer price changes have been more insulated.

If you have any questions or want to discuss this idea further feel free to reach out us.

1/27/2023: HSC improves

Summer ‘23 and Summer ‘24 HSC Basis prices have improved significantly from their 2022 lows. This could provide an opportunity to hedge against potentially softer prices.

Market: Houston Ship Channel Basis
Hedge: Swaps
Price: Summer ‘23 last settled at $-0.26, while Summer ‘24 last settled at $-0.41

HSC basis prices have improved. Hedging right now could lock in the best prices since October. We are concerned about HSC prices due to pipeline expansions out of the Permian. Our analysis shows that 2 Bcf/d of pipeline expansions could leave more gas flowing into the HSC market with no material increase in demand to meet it.

If you have any questions or want to discuss this idea, further feel free to reach out us.

1/26/2023: Monetizing sold calls for winter

With natural gas prices falling to their lowest level in over a year, the market has presented an opportunity to roll down sold calls in the winter. Clients with high-priced calls can explore this opportunity.
Market: NYMEX Henry Hub Winter ‘23/’24
Hedge: Monetize calls
Price: For example, if you bought back a $10 call and sold a $6 call that would net you 24c (Mid) End of day January 26
If you have executed a costless collar or sold any call option since August 2022, the value of that call has now declined. If you buy back the call you will realize a gain on the trade. This means you would no longer have a cap on your price. This offers a choice to either leave yourself uncapped and exposed to higher prices or sell a new call at a lower strike price.

For example, here is one trade for Winter ’23/’24 that was possible on Wednesday at the end of the day. You could have bought back a sold $10 call for 11.5c, and then immediately sold a $6 call for 35.5c. The two trades would have netted a gain of 24c.
Let’s take a look at your specific strikes because volatilities and natural gas prices will have changed since then.

1/23/2023: Opportunistic hedging while gas S&D is weak

Even though there were positive announcements on Monday about Freeport LNG returning it’s 2+ Bcf/d of gas demand soon, our outlook for the supply-demand balance is still loose.
By our models, the market is oversupplied by around 2.5 to 3.0 Bcf/d, so Freeport’s return only brings the market back to historical “normal.” Increases in production throughout this year and most of next year could be met with very little gains in demand.
Therefore, prices are likely to drift lower. How do you hedge? On strong days.
We suggest accelerating your hedging choices when gas prices rise suddenly. Yesterday’s move was a good example of such a day.
Market: NYMEX natural gas, Summer ‘23
Hedge: Swaps or collars
Price: $3.45 (approximate bid price; Monday after-hours)
How should you add? Let’s start with near-term gas if you’re underhedged. How much? Let’s look at your goals for this year’s total revenue. We have some new tools that can help find the right total amount.

1/20/2023: Underhedged in gas? Let's start here.

In natural gas, winter premiums are essentially gone, and we have passed the statistical peak of winter. From now through spring, the supply-demand balance will progressively get looser. This year, we’re leaving peak winter averaging around 2-3 Bcf/d oversupplied.
It’s lining up for weakness, unless weather cooperates or production stalls. Yes, there’s a key LNG plant coming back soon, but that’s the only real bright point for gas fundamentals we see for late winter or spring.
We noticed your percentage-hedged is a bit lower than your other peers who are AEGIS clients. Consider either some swaps for Summer ’23, or a costless collar. The chart I include below shows what the approximate cap for your choice of put (floor) strike.
Market: NYMEX natural gas, Summer ‘23
Hedge: Swaps or collars
Price: $3.24 (approximate bid price; near Friday close)

You may not think a $3.24 summer gas price is very attractive. From a historical perspective, looking back in the last five years, it’s actually high.
But we think there’s more room to move down. We would prefer you add at least another layer of protection to insulate from what could be a worsening supply-demand balance through this year.

1/17/2023: Summer Waha is strongest since early August

Two things: We’re worried about Waha basis coming out of winter, and the Summer 2023 strip just improved greatly.

Waha basis for the upcoming summer has snapped back to where it had averaged most of mid-2022.

Product: Waha basis
Tenor: Summer 2023
Last price: -$1.96/MMBtu (as of near close, January 13)

Waha still has more downside risk, in our view.
• New pipeline capacity is coming, but not for a while. Best case for some small new capacity is 3Q2023 (Whistler expansion). Any growth in production may strain the basis market.
• AEGIS is concerned that the marginal molecule will be required to price at a discount, to travel on northbound pipelines.
• Some analysts are expecting that pipe capacity could be fully utilized as early as this spring, on some days.
• Cash basis could be volatile and influenced by pipeline maintenance and wind power generation.

Take a look at our Waha reference article here for more background.

Feel free to reach out to me if you have any questions.

1/13/2023: weather-lifted Rockies basis presents a multi-year hedge consideration

Weather may have juiced the Rockies gas market in an unusual way in the last several weeks, but Western gas markets have shown in many recent years that the region’s S&D balance is very vulnerable and conducive to price increases.

It may be a good time to consider hedging some Rox gas on recent strength:

Product: Northwest Pipeline ROX (NWPL ROX/OPAL)
Tenor: Year ‘round.
Feb ’23 last price: +$20.01 (yes, that’s basis, not flat price; as of 1:30 PM Central)
Summer ’23 last price: -$0.13

It’s not just near-term pricing. The forward pricing for Rox basis has risen, too. It seems traders have incorporated some future upside price risk. The chart below shows how the Rox basis forward curve looks now compared to six months ago. It’s not on the chart, but CIG basis did move similarly, but not as much.

Helping this market move higher is slightly below-normal storage in the Mountain region, and extremely low storage to start the year in the Pacific region (California and PacNW). That may explain why NWPL Rox basis moved more than CIG did, because Rox is directly connected to the West via pipeline.

There are two primary ways we would consider hedging this, and our favorite is the simplest: A year-round average lets you take the winter premiums and supplement or boost the summer tenors.

A second way is to overweight summer hedges and underweight winter hedges.

Either method would capture some of the recent rally in basis.

AEGIS TOOLS

11/16/2023: Warnings and Guidelines: Holiday Hedging

Hedging during the holiday season is not something to be completely avoided, but there are some warnings and peculiarities we like our customers to know. Planning goes a long way. The bottom line: there are things to be careful about hedging during periods of lower liquidity, but their AEGIS customer team is available and working full hours.

10/26/2023: AEGIS Press Release

Good afternoon,

The prompt month WTI futures contract is currently down $1.67, indicating $83.71, while the prompt month HH contract is currently up $0.16 with a last print of $3.173. Please see our First Look for today’s market-moving headlines.

We wanted to provide a quick update on the AEGIS SEF as we’re now past the one-year mark of being live. 

We have 23 dealers (aka counterparties) transacting through the SEF as we added Bank of America/Merrill Lynch and Capital One in 3Q.  We expect several more to join before the end of the year.

This will be the last time you’ll hear me call it “SEF”, as we’re changing the name to AEGIS Markets.  The new name better reflects the benefits we’ve seen over the past year – increasing efficiency and transparency (as well as compliance) in the markets that matter to you. 

Along those lines, another key focus going forward is to leverage data from AEGIS Markets to give new insights into your hedging program.  We’ll have much more to share on this topic before the end of the year, and we think you’ll find the insights valuable.

10/18/2023: AEGIS Webcast Covering Oil and Gas Markets

Webcast Registration - Aegis Oil and Natural Gas Fundamentals Update

AEGIS webcast will cover how recent geopolitical conflicts could impact oil prices, where various weather scenarios could lead gas inventories to, and what trading trends have looked like recently.

Webcast Agenda

What is the Hamas-Israel effect on oil price?
Oil fundamentals remain bullish – Saudis in control
2023 trading trends and a look at how volume accumulates by strip
Gas has recently rallied, but unlikely to sustain without boost from weather this winter
We look at winter’s weather pattern setup and run storage scenarios

8/23/2023: AEGIS Energy Webcast

Register today for the AEGIS webcast. Our team will be going live at 2:00 pm Central on Thursday, August 24, 2023. You can register Here.

The Agenda Includes:

Updates on crude as WTI crude bounces around $80/bbl
A look at the gas markets now that most of the summer is in the rearview mirror
How a tightening market for sour crudes impacts Canadian differentials

In addition, we’ll be having a special segment on how to determine how good or bad a Costless Collar is priced based on current and historical put-call Skew.

7/11/2023: AEGIS General Outlook and Indications

Market: NYM WTI CMA & NYM HH

We are bullish on NYM WTI CMA prices throughout the curve and believe that the current strip does not accurately reflect the current fundamentals.

We are neutral on NYM HH in the near term, with price depending on the weather, and bullish in 2025 and beyond due to the tremendous demand expected to come online with the next wave of LNG export facilities scheduled to come online in 2025-2027.

Please see the current indications below. If you would like to see specific recommendations for your goals and break even feel free to give me a call.

6/27/2023: AEGIS Webcast Covering Gas Basis and More

Webcast Agenda

Hedge analysis using our Recommend module
Macro natural gas
Gas basis tour of our most traded locations
Macro oil

https://aegis-hedging.com/news/aegis-webcast-june-2023-energy-market-updates?utm_campaign=Energy-Webcast&utm_medium=LP&utm_source=GMB&utm_content=aegis-webcast-june-29&utm_term=2023-June

AEGIS webcast will cover macro crude and how two bullish factors identified for 2023 haven’t panned out. Natural gas will likely be well supplied through 2024, but what about regional risks? We will go around the U.S., checking in on many prevalent gas basis locations. In addition, we will provide an example of our AEGIS analytics and Recommend solver that will highlight a mathematical approach to achieving hedging goals and restructuring.

Note to Clients: Our technology and analytic tools are only as good as the data provided. Keeping the most up-to-date production on the AEGIS platform assures accurate hedge recommendations.

5/23/2023: 95% Revenue Certainty | AEGIS can build this plan for you

How do you know whether to hedge if you don’t have an opinion of whether prices will move higher or lower? Is it true that costless collars provide more upside exposure as a hedge? (Hint: they don’t) How much should I hedge? Should I hedge more or less if prices rise?

These are questions you can answer, right now, using AEGIS Recommend, recently launched for some customers.

AEGIS Recommend provides insight into the most optimal hedge structures for reaching a desired Revenue Target, $/BOE, or $/Unit. Many of our clients utilize this module because it provides a perspective of hedging without any market sentiment by showing a side-by-side comparison of different hedging instruments. Please see the highlights and assumptions below.

*** Please note that this data and output is for XYZ client, if you would like to see a more customized output to your book or portfolio, please let me know.

Assumptions:

Cal 25 NYMEX WTI CMA Swap Example Solving 95% success to secure $99 million dollars

PDP: 150,000 bbl / mo

Tenor: Cal25

Revenue Goal: $99,000,000 or $55/bbl

Current Hedges: None

In the Hedge Solution Summary below we show you 4 different outputs. Scenarios A, B, and C show what volume and hedge structures are needed to have 95% confidence of achieving that revenue target.

Current shows what the client’s portfolio would look like based on current market conditions if no hedges were to be put on. The portfolio has a 54% chance to reach the $99 million target.
Solution A shows by swapping in 72.8% of volumes with the current $64.72 Swap, you have a 95% chance you will hit the $99 million target.
Solution B shows by buying puts with the current market landscape, it does not enhance your portfolio and you cannot achieve your goal.
Solution C shows by putting a $60.00p x $69.21c costless collar on 82% of your volumes, you have a 94% chance you will hit the $99 million target.

5/18/2023: AEGIS Webcast Today Covering Oil, NG, and NGLs

Don’t get left behind! Register today for the AEGIS webcast. Our team will be going live at 2:00 pm central. You can register HERE.

Today’s Agenda Includes:

Oil balances are poised to tighten
Weather scenarios show a wide range of outcomes for natural gas
Recent hedging opportunities
Natural gas clients severely underhedged, in aggregate

NGLs: status of ethane, propane, and natural gasoline

4/5/2023: AEGIS Energy Market Webcast Tomorrow: Insights and Trade Volumes Increase as Crude Climbs Above $80/Bbl

Here’s a chart showing our recent trade volumes. We have seen a rise in trade volumes, with the majority being swaps, as the price of WTI rose back above $80/Bbl and the first quarter came to an end.

Additionally, we are excited to announce that AEGIS Hedging Solutions is hosting an Energy Market Webcast tomorrow, April 6, 2023, at 2 PM CDT. This webcast will cover a range of topics related to the energy market, including a quick look at risk scenarios using our Recommend and SEF platform, macroeconomic concerns, and a holistic look at oil products.
Furthermore, we will be discussing the recent surprise off-cycle cut by OPEC+ and its potential impact on the market, as well as the current pressures facing the natural gas market.
We look forward to your participation and sharing our insights with you. SAVE MY SEAT

3/22/2023: What is Counterparty Risk and What Are Best Practices?

In light of the Silicon Valley Bank (SVB) collapse and recent banking issues and concerns, AEGIS would like to explain what your counterparty risk looks like and encourage you to diversify that risk, if you have not already.
What risks do you have with your trading counterparties?
There are two credit-related ones to consider:
https://aegis-hedging.com/insights/what-is-counterparty-risk-and-what-are-best-practices

REFINED PRODUCTS, MISC MARKETS

8/18/2023: Rally in Propane Creates Hedging Opportunity

Market: MB Propane

Hedge: MB Non-TET Swap

Price: Bal ’23 - $0.6738/gal

Cal ’24 - $0.7037/gal

Mont Belvieu propane prices have climbed to more than 67c/gal since early July, despite a well-supplied market for propane. The rally has come off the backs of a 15% rise in WTI prices over the same period.

We see this as a good opportunity to mitigate propane exposure.

Our recommendation to de-risk comes while we remain bullish on WTI and propane, but from a risk-management perspective, this is a good opportunity to layer on hedges.

Please read our recent post here for a deeper look at current propane supply/demand dynamics and price action.

8/8/2023: Airlines Face Mounting Fuel Costs

Subject: Airlines Face Mounting Fuel Costs

Market: US/Global Jet Fuel

Hedge: Bal 2023 – Winter 24

Price: Varies

We recommend taking advantage of backwardation in the jet fuel forward curve to realize lower prices in a tightening supply environment.

The second quarter earnings showed airlines benefited from low fuel costs driven by pressured crude pricing. Rapidly tightening crude markets indicate this will no longer be the case. Rising crude prices are poised to lift jet values, while stronger margins for gasoline and diesel will curb marginal jet production.

The forward curves for jet and other refined products continue to shift higher in response to supply tightness.

The chart below shows the New York Harbor jet fuel forward curve as of August 4 compared to July 3. The August contract rose more than 66c/gallon, or 29%, over the course of just one month. Forward prices rolled up 18% on average across the curve.

Today we would like to highlight the inherent risk for airlines to continue to approach tightening energy markets without sufficient hedge protection. Inventories for gasoline and diesel are near or below the five-year range, leaving the market heavily exposed to outsized upside risk from refinery outages, hurricanes, turnarounds, and other supply-side outages. With diesel demand from harvest activity and heating oil consumption approaching, we further stress the urgency. The same trends underlying this recommendation apply to those clients facing consumer diesel exposure.

7/12/2023: Hedge ethane to capture premium to natural gas

Market: Mont Belvieu Ethane

Hedge: Bal Summer 2023 and Summer 2024

Price:

If you hedge ethane, now is a good time because of price strength; if you choose between hedging ethane or gas, hedge ethane. Ethane is currently priced at a premium to natural gas. We remain neutral to bearish on natural gas through the Summer 2024 strip. Therefore, because natural gas is the fundamental price floor for ethane, ethane has more chance of falling than rising.

Natural gas acts as a floor for Ethane on an MMBtu basis (see the chart below for evidence). The fundamental reason for this floor is that many processing plants choose to “reject” ethane (sell it as gas) when ethane is too cheap relative to gas. Generally, we suggest hedging ethane when the frac spread, the difference between ethane and natural gas in MMBtus, is “wide.”

The next few months show a frac spread of about $1.00/MMbtu, a difference that historically could be considered “wide.”

As a producer, your hedges are short positions, which benefits if prices fall. When you have a choice between two products to hedge, like ethane and natural gas, you want to hedge the weaker of the two. In other words, when the frac spread is near zero or negative (light blue line remarkably close to the dark blue line), you would want to hedge natural gas rather than ethane.

The chart below isolates the Cal 2024 strip for the frac spread. It shows that ethane has been trading near its highest relative value to natural gas since the beginning of the year. We see this as a good opportunity to hedge the ethane. We have a bearish outlook for natural gas in 2024 (Ethane’s fundamental price floor, natural gas, is expected to realize lower). If ethane is priced at a premium to gas, then ethane is likely to not only be driven lower by weak gas prices but also by the frac spread potentially narrowing.

Our rationale here primarily depends on a bearish gas outlook but secondarily on the frac spread becoming smaller. However, if you were bullish on ethane prices in 2024, then you could make a case that ethane prices could stay at current levels even if natural gas were to fall. AEGIS does not have a bullish stance on ethane’s own supply-demand balance in 2024; therefore, we look to our gas view as the driver of ethane prices in 2024.

5/4/2023: Airlines Lock in Jet Prices Amid Heightened Volatility

AEGIS recommends buying 2H23 swaps to offset heightened volatility and protect the summer and holiday travel seasons.
Example Hedge: Client buys 2H23 jet swaps to offset physical exposure
Market: Jet Fuel
Hedge: Buy swaps to achieve fixed pricing for a portion of physical fuel risk exposure
Price: 2H23 Swap $2.275
Airlines are showing increasing interest in protecting against physical price exposure amid a choppy recovery in demand. While US jet fuel demand is in an upward trend, widely disparate views on the economy, coupled with noise from erratic weekly data, show a volatile recovery for the aviation sector.
The economy is a huge swing factor, driving 2H23 volatility. Tremendous weakness in diesel markets—the leading indicator for the industrial health of the economy—indicates trouble on the horizon. While airlines could see diesel demand erosion and a backwardated structure as a path to continued lower pricing, refiners are likely to cut run rates to shore up battered margins. This will tighten the supply for jet and thus add upside risk. Jet is a straight-run product, meaning roughly 10% of a refinery’s output will be jet no matter how yields are adjusted.
Given the pronounced volatility in the factor matrix, we advise clients to lock in increasing product exposure to lock in returns and add operational certainty. Fuel costs account for roughly 30% of an airline’s operating expenses, meaning a move of even $0.01/gallon would impact the company’s bottom line.

3/23/2023: Time to De-risk Diesel Exposure

Market: NY Harbor ULSD, USGC Diesel
Hedge: Swap
Price: April-December ’23 @ $2.43/gal
Cal ’24 @ 2.44
If you have exposure to diesel this could be a good opportunity to add hedges at an attractive price. Consumers of diesel who already have hedges on the books can use this opportunity to average cost down their weighted price, and those who have yet to de-risk their exposure can execute hedges at levels AEGIS believes are of great value.
As oil prices have fallen amid economic uncertainty and fears of a potential banking crisis, prices for refined products have also declined. AEGIS maintains its fundamental view that the forward curve for oil and refined products is undervalued.

1/25/2023: Ethane hedges may be useful as gas is moving lower

As natural gas prices suffer, ethane has not fallen as much. Usually, these two markets are very highly correlated, but ethane has seen relative strength against its substitute. This is a chance to hedge your ethane exposure with ethane itself, rather than a proxy hedge with natural gas.
Market: Mt Belvieu Ethane 2Q-3Q
Hedge: Swaps
Price: $0.2475/gallon (approximate bid price; Wednesday after-hours)
This idea is especially relevant if you know that your processing plants will be collecting ethane instead of rejecting ethane in the next several months, because of the small premium ethane now holds over gas.
The chart below shows natural gas prices in history and the most recent forward curve, in its native units of $/MMBtu. It also shows ethane, converted to $/MMBtu from $/gallon. The chart shows that the ethane forward curve (light blue dots) are implying a premium. Selling (hedging) this market captures some of that premium.

For 2Q and 3Q of this year, the average premium ethane holds is about $0.44/MMBtu. In the chart, the gray area shows how the premium is highest in the near term.
Trading around ethane and natural gas values is tricky if you are not the operator. It’s also not a good idea if you do not actually receive ethane pricing in your marketing agreements. I can help you with figuring that out.

AEGIS Council Recommendations (AEGIS Reference)

November 16, 2023 | Chris Stadele

CRUDE OIL

NATURAL GAS

AEGIS TOOLS

REFINED PRODUCTS, MISC MARKETS

CRUDE OIL

NATURAL GAS

AEGIS TOOLS

REFINED PRODUCTS, MISC MARKETS

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AEGIS Council Recommendations (AEGIS Reference)

November 16, 2023 | Chris Stadele

CRUDE OIL

NATURAL GAS

AEGIS TOOLS

REFINED PRODUCTS, MISC MARKETS

CRUDE OIL

NATURAL GAS

AEGIS TOOLS

REFINED PRODUCTS, MISC MARKETS

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