Week Ending April 1

April 1, 2021
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Crude Oil

West Texas Intermediate finished higher week-over-week despite OPEC+ deciding to gradually increase output over three months. All eyes were on OPEC and its allies’ April 1 meeting during the short Easter holiday week. Many analysts were expecting OPEC+ to keep oil output quotas steady. However, according to the WSJ, the cartel will raise its production by 350 MMBbl/d in both May and June and then increase by 450 in July. Saudi Arabia will also roll back its extra, 1 MMBbl/d compensatory cuts evenly over the same period.

Earlier in the week, the OPEC Joint Technical Committee (JTC) showed that OECD oil inventories would drop down to the five-year average by the end of June – even with increases in supply starting in May. If their analysis is correct, then the global oil market is undersupplied and eventually needs more barrels to meet demand. OPEC+ is managing the oil market closely, and cooperation and compliance between the group are strong.

According to IHS Markit, petroleum product demand is expected to rise by 3 MMBbl/d over the next three months, making the planned OPEC+ output increases conservative. Following the meeting’s conclusion, we understand that OPEC+ production is rising; however, the demand recovery is uncertain.

AEGIS recommends swap structures for most client portfolios if current prices are palatable. Swaps are better for increasing books’ average weighted price. Option structures could be useful if the portfolio already contains many swaps or if capturing more upside is the goal.

Natural Gas

Gas prices made minor improvements this week. Weather-driven demand gains and a bullish beat for the weekly storage statistic helped move prices higher.

We are watching the supply and demand dynamics following disruptions caused by winter storm Uri in mid-February. Storage withdrawals from late February to the week of March 19 implied a loosening S&D outlook, by our estimates. The next few weeks’ storage statistics may confirm if there is a fundamental change in supply and demand in store this summer.

AEGIS continues to recommend utilizing costless collars across much of the client’s hedging window. It could be argued that more near-term contract months (May, June) could be de-risked using swaps to protect against shoulder season weakness. Yet, we prefer collars given our belief that the current curve is underpriced.

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