Week Ending April 23

The June '21 WTI contract lost $1.05 on the week to settle at $62.14. Demand concerns from the world's third-largest crude importer, India, weighed on oil prices throughout the week as the country has had a surge in new COVID-19 infections.

OPEC's close management of the oil market, with their apparent goal of matching additional supply with demand increases, has helped result in oil prices trading sideways since mid-to-late March. The group and its allies will hold its next official meeting on April 28 to discuss its current policy. There were rumors that the group would downgrade the meeting instead of hosting a full-scale ministerial meeting, but it appears another full meeting will occur. According to Bloomberg, the Saudi Oil Minister, Russian Deputy Prime Minister, and the Angolan Oil Minister are expected to make opening statements.

Demand in the U.S. has continued to strengthen. U.S. refiner, Valero, said demand for gasoline and diesel is at 95% and 100% of pre-pandemic levels. The number of Americans filing new claims for unemployment benefits fell to a 13-week low last week. The global economy continues to improve, but COVID surges and the subsequent lockdowns continue to temper some more bullish outlooks.

AEGIS short-term hedging recommendations are weighted toward swaps rather than options structures. The front of the curve may not be as high as it was in early March, but backwardation has relaxed, and the longer-dated tenors have edged closer to 90-day highs. Swaps are recommended for Bal 2021 at close to $60/Bbl. This protects against downside risks posed by OPEC+ and Iran. A combination of swaps and collar hedges is suggested for Cal 2022 to retain some upside participation. At $54.50 for Cal 2023, we recommend using collar structures to allow for more upside.

The natural gas curve moved higher this week, rising over 5c in the front to $2.73 and approaching $3.10 for the Winter 2021-2022 strip. Weather forecasts showed a large swath of below-average temperatures for the central U.S. The late-season heating demand and a bullish storage number on Thursday were tailwinds for price.

This week's report of a 38 Bcf injection into storage for the week ended April 16 showed, by our estimate, the tightest market balance since February. Weekly statistics can vary, but our measure of market tightness has been increasing for two months now. The adverse effects on gas demand by Winter Storm Uri have lingered until recently. Wind generation has outperformed, displacing natural gas in large volumes for much of the spring. We estimate the total power load is back to 2019 levels; however, higher prices have contributed to the year-over-year loss in gas demand for power generation.

AEGIS recommends hedging Bal Summer 2021 with swaps. This does not mean we do not expect part of the summer strip to continue rising. We recognize many producers would gladly de-risk their portfolio at $2.86 for Bal Summer. We continue to recommend utilizing collar structures in Winter 2021-2022 to capture call skew and typical winter price volatility. Summer 2022 presents a different challenge as the strip hasn't moved much in the past five months. At $2.54, we suggest setting the widest collar tolerable to one's portfolio as we believe this part of the curve is still undervalued.