Week Ending February 26

February 26, 2021
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Crude Oil

WTI has rallied over 30% since January 1 to $62/Bbl as of February 26 – the largest percentage increase to start a year in at least the past 30 years. You may hold a continued bullish view from current levels, but we recommend taking a hard look at de-risking your portfolio as Bal 2021 trades at $60/Bbl and Cal 2022 at just above $55/Bbl.

Usually, a costless collar is used to allow for more upside participation. However, puts options are relatively more expensive than call options – the opposite of what you want as a producer. The current put-call skew may push producers toward using swaps instead. Swaps may be the better option right now, given the lopsidedness in collars. A Cal 2022 costless collar was $50 X $58 on Friday, when the reference swap was $55.13. This structure would be giving up $5 to the downside for $3 of upside. If your portfolio is already swap-heavy, but you would like to add more upside exposure, then collars may be beneficial to facilitate a diversified portfolio.

Natural Gas

The prompt-month gas contract, now April, has dipped nearly 20c since Monday (Feb. 22) as weather forecasts shifted warmer. The weakness in the front of the curve does not change our bullish outlook for the next year.

The gas market is undersupplied, in our view. This article (link) has some good evidence. With the help of February’s polar-vortex weather event, gas storage levels may end winter near 1.5 Tcf. Last week’s inventory draw was the second-largest on record.

AEGIS continues to recommend a combination of swaps and collars this summer and collars in winter, depending on individual portfolios. We believe the curve is not representative of the bullish fundamentals, and for this reason, the trade desk suggests upside-friendly structures.

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