Week Ending February 5

WTI crude oil has rallied nearly $10/Bbl to about $57 since the beginning of 2021, and nearly half of that has come in the past week. The helping hands include unilateral Saudi cuts, weak dollar, strong Asian demand for commodities, hopes of fiscal stimulus, and ongoing OPEC+ cuts.

The WTI curve has increased in backwardation as prices in the front of the curve have outpaced those in the back. When backwardation steepens it usually means that the physical market is bid, and demand for crude today is strong. The 12-month March 2021-March 2022 spread was only -$2/Bbl wide a month ago. Now that same spread is -$4.79/Bbl.

AEGIS trading recommendations for WTI vary by tenor. We advise swaps in Bal 2021 and Cal 2022 based on current option skew, not based on commodity point of view. If you hold a bullish POV, then you're going to have to sacrifice some skew by not getting good value for the calls you sell. A Cal 2022 costless collar as of Friday was $45 X $54.60, giving up nearly $6 on the downside for $4.60 on the upside — not too bad, but not getting as much value for the sold call.

To see details on factors we believe are affecting oil prices and trade recommendations, click the "Read More" button on the Factor Matrix section in the AEGIS Research Module.

The gas market has been exceptionally volatile with weather models flipping back and forth from very cold, back to cold, then to very cold. Watching the March contract this week could have given you motion sickness after three out five days saw 20c intraday swings. It's likely the increased volatility is caused by an upcoming forecasted cold spell and its effect on storage levels. The market is already tight when normalizing for weather; add some cold weather to the mix, and you get large withdrawals from storage on a weekly basis.

AEGIS is still has an upward-biased view of gas prices for this summer and next winter. Our structure recommendations are designed with this in mind. We recommend a 60%/40% split for the summer strip between swaps and collars. It's hard to turn down nearly $3/MMBtu for this summer, but those with bullish views can now set your option floor nearly 20c higher than you could two weeks ago and capture more upside. A Summer 2021 collar is now near $2.70 X $3.09, while two weeks ago the swap was $2.65. For Winter 2021-2022 we recommend using costless collars to capture the natural call skew in the winter months.

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.