Week Ending December 11

December 11, 2020
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Crude Oil

WTI ended up where it started this week, barely changed at $46.57/Bbl, from last Friday’s price of $46.26. The first two years of the curve kept its flat shape, with a slight discount in Cal ’22 at $45.20.

Six months ago, we know many of our clients were hoping for mid-$40s prices. Now is the time to act if those prices meet your budgets. Selling into price strength usually works out.

Yet, we understand that $46 oil means very different things for different clients. For some, the net margins are thin, while others could tolerate some price correction if WTI were to slip back toward $40.

For most clients, especially those who are underhedged for 2021, we would recommend swaps to convert your variable-priced oil sales to fixed-price. This recommendation is not only reflective of our market-price outlook; costless collars right now require an oil producer to give away more upside than may be wise. For example, a 2H2021 priced during the day on Friday was approximately $40 X $50 (that is, floor X ceiling) while the underlying price was around $46. There is an embedded “penalty” or “fee” of around $2 because of skew in options prices, where puts are relatively dearer than analogous call options.

Natural Gas

After a horrible slide during November and early December, gas prices reached, then recovered from, lows this week. The January contract settled at $2.41 on Monday, but reversed course and closed near $2.59 on Friday. It was good to see Summer ’21 rise — up 12c to $2.69 — more than the winter tenors, showing that there are still active bidders in the curve.

Most AEGIS clients are no longer looking for many winter hedges. That part of the curve is well hedged and set. For those still needing winter hedges, we note that the warm start to winter has taken away much of the scarcity threat. We expect even chances of prices moving up or down, depending on weather.

There may be more gas available in storage to start summer as a result of low wintertime demand. We think summer 2021 prices dropped more than was reasonable, and this week’s price recovery perhaps corroborates our view. We still believe demand is outpacing supply, and prices need to move higher and stay higher to either (1) destroy some demand, probably gas-fired power generation, or (2) encourage more drilling and completions activity. The latter could come from higher gas prices or higher oil prices.

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