Week Ending December 24

As the year ends, our recommendations for hedging are not changed. Both oil and gas hedgers have a choice between shoring up 2021 financials or pursuing some market opportunities.

This is the first full week at AEGIS with our new colleagues from Risked Revenue, after the acquisition closed last week. Already their rich analytics capabilities have proven valuable to clients. Two examples are linked in the text below. And to the former Risked Revenue clients, you soon will have a new set of portfolio-management and workflow tools via the AEGIS Platform.

Now, on to the markets

The end-of-year AEGIS Webcast, where we address risks in 2021 for oil, gas, and natural gas liquids, is available here.

WTI and Brent may have lost some from the run they had since early November, but even though oil is a bit lower than the 10-month high set recently, the curve provides some good value as it stands, without having to resort to options structures.

We have recommended using swaps as the default structure for hedging oil through mid-2021 tenors because of fundamental worries, but now the swaps are wise because of opportunity.

We reiterate the recommendation to use swaps for any baseline, protective hedges through mid-2021. However, it is good timing to reach out farther into the curve and lock in these prices, not just for the near-term, but through 2022 if you are behind schedule on your hedges.

Short-term risks are too numerous to recommend using collars. With Brent around $50, we doubt OPEC+'s commitment to withholding supply. Hedging activity at AEGIS has increased with this vertical shift in the curve, implying higher realized prices for producers and more drilling activity. The U.S. dollar's weakness has artificially increased prices and could reverse. Consult the AEGIS Factor Matrix, available via the AEGIS online platform, for a full discussion.

Toward late 2021, collars may make more sense for many as some supply-demand risks fade. But the collar is not a perfect choice. Consider the Cap/Floor Index we discuss here, which shows how collars require the producer to sacrifice more upside than is "fair."

Near-term risks are tied to weather, but fundamentals are already showing supply tightness at a level not seen in three years. Further, as we point out here, chart patterns show a failure at $2.69.

Therefore, our recommendations are tied to tenor. While few AEGIS clients still need substantial hedges for the remainder of winter, those who need to act should look to swaps.

For Summer 2021, there is a choice to make: it's a judgment between protecting financials and budgets or preserving exposure to higher prices. During the day on December 24, the Summer 2021 strip was achievable at a bid price near $2.67. That level is likely at many gas-directed clients' budget thresholds. For those needing a base level of protective hedges, the swaps may be wise.

However, if you can tolerate some price weakness in exchange for some potential upside, a representative collar could be had at $2.50 X 2.82. In one way, that collar is unattractive in that it is skewed, meaning you don't gain as much upside exposure as you gain in downside protection. However, if you believe in the fundamentals for 2021, then the collar is a good choice for some opportunistic hedges.