Week Ending January 8

Not only was WTI up 8% this week, but the front of the curve showed increased backwardation, a usual sign of a tightening supply-demand balance. In other words, the more-downward-sloping curve shows buyers are concentrating their purchases in the front of the curve. They are competing for supply. It's a good sign.

Feb WTI settled at $52.24 on Friday, up from $48.52 a week ago. But the move was more subdued out the curve, with Cal 2022 up to $48.12 from $46.61. Such is the curse of a crude rally: You get the good up front, but the back rarely keeps up.

The difference in the oil market this week from last week is easily attributed to Saudi Arabia. Apparently to keep the OPEC+ supply-cut deal in place, the Kingdom shouldered another 1 MMBbl/d of cuts. It should help keep the near-term balance much healthier than what was expected a week ago. This is the kind of shift that can sustain a rally.

Still, we note the OPEC+ deal is still month-to-month, and the cartel will be having these discussions again soon. Take the gift that is a cheap U.S. dollar and an active Saudi Arabia and add some swaps. If you want to preserve upside, try to concentrate the collars in 2022. Any action needs to be consistent with your plans and current portfolio, so let's have a conversation.

The hellish 6-10-day weather forecast looks nothing but bearish, but gas prices are up this week. Two weeks from now, there are some chances for widespread cool weather. That change has helped the Feb contract gain 16c this week to close at $2.70 on Friday. Summer picked up 11c, too, and now sits at $2.76. Next winter stopped just short of a three-handle at $2.98.

All that price improvement presents the producer with a conundrum. Should you take this rally and hedge with swaps to lock-in the highest prices in three weeks? Or, play it for a higher ceiling?

We like collars, in general. Even with mild weather so far this winter, the gas supply-demand balance is doing well. Most of the bearish price moves, in our view, are because of physical sales of gas that was no longer needed as the weather realized warmer-than-normal.

For those who already have a good foundation of protective hedges, additional hedges would be well served with collars. Yet, many would find a mix of swaps and collars attractive, as you can improve your floor a bit, and buy time for any further rallies. As always, every client is different, so we hope to have the conversation with you.