Crude Oil
WTI settled Friday within 53c of $60/Bbl, its highest mark since January 2020. Cal 2022 is now above $52/Bbl, a level the front of the oil curve held only two weeks ago. Oil’s rise over the past few weeks comes after the announcement of Saudi production cuts, which we believe contributed about $6 of WTI’s appreciation. If you believe in an efficient oil market curve, a curve that reflects all known news, then the backwardation from near $60 in the front to $52 in Cal 2022 is consistent with Saudi Arabia ending the cuts this year. This makes sense as most see the extra Saudi cuts as temporary.
We believe the market has priced in many bullish factors that have landed WTI just shy of $60/Bbl and find it difficult to advise on waiting for even higher prices before de-risking a producer’s portfolio. There are scenarios where oil prices could continue to move higher, and some excellent analysts hold this view. Many of those bullish positions hinge on how quickly and when demand returns for many Western countries. We are uncertain on this timeline as the return of demand has been generally flat across developed nations for many months now. AEGIS recommends swap structures for the balance of 2021 and either swaps in 2022 when budget certainty is paramount, or collars to capture more upside. At these price levels, it depends on the producer’s individual needs and book.
Natural Gas
The gas market has been volatile over the last couple of weeks as weather forecasts flipped from very mild to very cold. This month’s weather pattern is almost perfect for gas demand; it could be the eighth coldest of all-time and third-coldest in the last 20 years in gas-demand-weighted terms.
About 5 Bcf/d of lost supply due to freeze-offs are tightening the cash market. Residential, commercial, and power-generation demand have spiked. Spot prices reached their highest levels in over a decade late in the week; however, futures have had a small response so far.
The AEGIS trading desk recommends hedging structures be split between swaps and collars, depending on your book’s current positioning. In our view, there is more upside potential for Henry Hub this summer. Chances of large production increases are low, and inventory levels should be normal to begin the summer injection season.
Despite our constructive view, a Summer 2021 strip at $3 is attractive, and many should choose to add swaps to lock-in these levels. For Winter 2021-2022, we see too much potential upside; despite only moderate call skew, we still recommend using costless collars to allow more room for upside participation.
To see details on factors we believe are affecting gas prices and trade recommendations, click the “Read More” button on the Factor Matrix section in the AEGIS Research Module.
