Crude Oil Bottom Line – The pandemic still remains in focus as current, and new lockdowns persist. The March contract traded mostly sideways since breaking through $50/Bbl in early January, and AEGIS sees more risk weighted to the downside at least in the near term.
The February WTI contract rolled off the books this week, leaving us to focus on the March contract that ended the week at $52.27, mostly unchanged from Monday.
The WTI curve did get slightly more backwardated this week after longer-dated contracts lost more value than did the front of the curve.
AEGIS trading recommendations reflect a more conservative view for the remainder of the year as swaps are preferred over less attractive costless-collar structures. Beyond 2021 some clients should entertain a three-way collar. An attractive structure available as of Friday is $45 (Put) / $30 (Short Put) X $53.70 (Call). Three-ways are not for everybody, but this can be a solution to the costless collar pricing that would cause you to give up $6 to the downside while only gaining $4 to the upside in Cal 2022.
Natural Gas Bottom Line – Plenty of downside pressure hit the gas market this week as weather forecasts turned milder. Fundamentally the gas market is in a good position when normalizing for weather. We still believe a combination of swaps and collar structures makes the most sense for the next two gas seasons of hedging.
Sellers took control of the gas market for the week ended January 22. The February contract suffered a 29c loss on the week to settle at $2.446. The pain was felt further down the curve, with the Winter 2021-2022 strip dropping 13c from last Friday to $2.912. Our trading desk has been suggesting a combination of swaps and or collars for the near Summer strip and the use of wide collars for next winter.
AEGIS is constructive on natural gas given strong underlying fundamentals, and our structure recommendations are designed with this in mind. Near-term price volatility can stir emotion, but this week’s weakness can be attributed to traders bending to weather model whims.